Normal everyday Minnesota company retirement plan participants are required to trust a group of financial experts to provide and manage their company retirement plan accounts.
The company retirement plan sponsor, the company retirement plan provider, and the mutual fund manager all share a responsibility to provide every individual company retirement plan participant a company retirement plan that will allow them to both preserve and grow their retirement savings.
Hiring a mutual fund manager to manage your company 401(k) plan account money carries by far the biggest risk. You should be aware that many times the investment objectives of the mutual fund manager are not the same as yours.
The mutual fund managers in your company retirement plan menu are hired to outperform an index. To do this, these fund managers have to highly concentrate the stocks they own in that index, and remain 100% invested at all times.
In a good stock market, these stocks go up in value. Most times, those stocks “outperform” the popular stock market averages.
But when the stock market goes down, there is a huge disconnect between the investment objectives of the mutual fund manager and your investment objectives as a mutual fund investor.
The mutual fund manager has no motivation to preserve the investment principal in the mutual fund. The mutual fund manager can never sell part of the stocks in the mutual fund in a declining stock market. There is always the fear that that the mutual fund may miss out on any future stock market gains.
When the stock market is clearing going down because investors are selling stocks, what future gains are going to be missed?
Another huge disconnect in how your company retirement plan mutual funds are managed has to do with compensation. Like most things in the investment world, a company retirement plan investor needs to understand how the professionals get paid.
The mutual fund company, and the mutual fund manager, are both compensated the most when mutual fund investors remain 100% invested in the mutual fund at all times.
Common investment management sense would dictate that a mutual fund manager would act to preserve as much of the principal value of the mutual fund during a stock market decline. This kind of investment management strategy would be in the best interest of the investors who own the mutual fund shares.
In reality, common investment sense like this takes a back seat to compensation.
Where do you think that the “Buy-and-Hold” investment strategy came from? You are correct; it came from the mutual fund companies. The longer the mutual fund companies can keep retirement plan investors owning mutual funds, the more investment management fees they make.
When the U.S. economy and the U.S. stocks markets go through their normal periods of correction, the mutual fund manager continues a “Buy-and-Hold” all the way to the bottom of the economic and stock market cycle.
You are the only person involved in the investment management of your company retirement plan account who can act to preserve your company retirement plan principal during a stock market decline.
Ric Lager
Lager & Company, Inc.
