Regardless of your level of investment management sophistication, I am willing to be that you have heard or read about the concept of diversification.
Even the poor quality of the resources on your company 401(k) retirement plan web site provides information on the wisdom of owning a handful of stock and bond mutual funds in order to reduce the risk of a major decline in your retirement plan principal.
Diversification does reduce stock and bond market risk. What is not widely discussed about trying to diversify an individual company 401(k) retirement plan account is very hard to do. The main reasons are the lack of good retirement plan menu options and annual investment fees and expenses.
Company 401(k) retirement plan menus offer a very limited choice of quality U.S. stock and bond market mutual fund options. An independent, third-party analysis would reveal that most company 401(k) retirement plan menu options are really blended mixes of the S&P 500 and an intermediate level bond mutual fund. I bet that your company 401(k) retirement plan default menu option target date mutual fund falls into this category.
The high annual fees and expenses of these “clone” S&P 500 index mutual funds make the opportunity for diversification extremely difficult. It is much more expensive for an individual company 401(k) retirement plan participant to try to diversify their account than it is to just own an S&P 500 index mutual fund with lower annual costs.
Poor investment options and high costs. That is a one-sentence summary of the majority of Minnesota company 401(k) retirement plan menus.
Ric Lager
Lager & Company, Inc.
