Congratulations. In the last two weeks, you most likely have received a record high company 401(k) statement in your mailbox. Maybe you even cheated and looked online earlier in the month.
Record high stock market prices near the end of December earned you double-digit stock market gains for 2020. Any 401(k) mutual fund you owned last year went up in value.
Are you the kind of person who focuses on what they gained, or the larger amount they could have gained? If you fall into the later category, here are some serious considerations for your 2021 company 401(k) investment management strategy.
As impressive as your 2020 retirement plan investments returns were, the fact is your stock and bond market investment returns would be a lot higher. You should have been more fully invested in the handful of best-performing mutual funds on your default company 401(k) retirement plan menu.
There is very likely a huge investment performance gap between the two or three best mutual funds available on your 401(k) menu and the mutual funds you owned last year.
Like a lot of things in the investment management world, selecting mutual funds comes down to a basic math problem. The answer to the mutual fund investment selection issue in your company 401(k) account is solved by ranking the mutual funds by annual costs and investment performance.
The main reason the individual company 401(k) retirement plan participants don’t pay more attention to the mutual funds they own is because they have never taken the time to calculate in dollars and cents how much it costs them to continue to own the wrong mutual funds.
Here is the investment management term for this issue. It’s called “the cost of the problem.” The end result of the calculation is the dollar amount of company 401(k) account value it has cost you to continue to own the wrong mutual funds.
The best thing about this number is the “in your face” factor. There is no mutual fund marketing gibberish or financial industry marketing slogan involved. “The cost of the problem” is the bottom-line dollar amount of money you could have now in your 401(k), but don’t.
So, how do you know “the cost of the problem” in your 401(k) account now?
The value of calculating your current company 401(k) “cost of the problem” is where an independent, third-party, fiduciary-level investment advisor enters the equation. Access to sophisticated mutual fund annual fee and investment performance analytical tools can tell you exactly how large your problem may be now.
The annual investment advisory fees I charge my company 401(k) investment advice clients more than pay for the solution to their “cost of the problem” dollar amount.
An individual company 401(k) account investment advisor is a fee-only investment adviser. He or she has no affiliation with your company 401(k) retirement plan sponsor (your company) or provider (Schwab, Fidelity, Vanguard, etc.).
A ‘cost of the problem” calculation can help reduce your annual 401(k) mutual fund fees and improve investment performance. It will also provide peace of mind. The dollar value of how much more you could have in your company 401(k) account will cease to exist.
Ric Lager
Lager & Company, Inc.
