Have you ever noticed that the mutual fund options in your company 401(k) retirement plan menu are listed in alphabetical order?
Well, there is a research report published a year ago that answers that fact. And it found that mutual fund names beginning “early in the alphabet” are more likely to be chosen.
The first four mutual funds listed on a company 401(k) retirement plan menu receive an average of 10% more money each. Mutual funds listed 11th or lower received 10% less individual company 401(k) retirement plan participant contributions.
The research report states that the average default company 401(k) retirement plan mutual fund menu offers just over 19 mutual fund options. Another interesting result of this research report is that the more mutual funds offered, the more likely individual company 401(k) retirement plan participants are to choose the mutual funds at the top of the alphabetical list.
Who knew there was such a thing as “alphabeticity bias” taking place in company 401(k) retirement plan accounts across the country?
Most individual company 401(k) retirement plan participants don’t spend enough time and energy picking their mutual fund investments. They don’t even get close to reading through all of their mutual fund descriptions and sorting out the best-performing and lowest cost options.
There are three important company 401(k) mutual fund characteristics. Two are easy to find. The third one is harder to find but is the most important ranking characteristic.
The first important mutual fund ranking option is annual fees and expenses. Ask yourself if the annual costs of owning the mutual fund are more than covered by the most recent annual investment performance. It is very important to “get what you pay for” when you own any mutual fund in your company 401(k).
Which brings us to the second most important company 401(k) mutual fund ranking option; annual investment performance. There is a huge gap in what it costs to own the different types of mutual funds found on your company 401(k) menu.
Many articles over the years have been published on the merit of owning low-cost index mutual funds. Even more articles are available on the merits of target date mutual funds. The only remaining question is, which style of mutual fund on your company 401(k) retirement plan menu is the best one to own now?
The answer comes from accessing the annual performance information found on your company 401(k) retirement plan web site. Annual performance information is a required disclose to individual company 401(k) retirement plan participants. So are annual fees and expenses.
The last important company 401(k) mutual fund ranking characteristic is relative strength. This measurement is the current investment performance of each company 401(k) retirement plan mutual fund ranked against every other mutual fund option available to you.
Think fantasy football or the NCAA men’s basketball tournament bracket. Each of your default company 401(k) mutual funds can be ranked. Then compared to each other. At that point, the top two or three mutual funds you should own stand out by a mile.
Ric Lager
Lager & Company, Inc.
