By far the biggest frustration individual company 401(k) retirement plan participants face comes for choosing which mutual funds to own. Frustration with the “what do I buy” decision abounds. The majority of investors I talk to follow the “buy-and-hope” investment management strategy.
Making investment decisions with your retirement plan money does not have to be so complicated. Let me relate an experience that I had with an individual company 401(k) retirement plan investment advice prospect just last week.
This individual is a frequent reader of financial media web sites. He was very familiar with the Warren Buffet and Jack Bogle strategies that preach ownership of the lowest possible cost index mutual funds.
This prospect wanted to build a company 401(k) retirement plan account that had two main components; great investment performance and the lowest possible costs.
Fortunately, this individual’s company 401(k) retirement plan menu included the SDBA (self-directed brokerage account) option. This option allows for individual company 401(k) retirement plan participants to open a brokerage account within their company 401(k) retirement plan account.
Self-directed brokerage accounts are a popular company 401(k) retirement plan option now. If you don’t know if you have that option in your plan, call your company 401(k) retirement plan provider. The option to ask for is the self-directed brokerage account.
The self-directed brokerage account allows for a much wider selection of mutual fund options outside of the default company 401(k) retirement plan menu. With this expanded choice of mutual funds comes better investment performance options and lower annual costs.
I focused the prospect’s attention on the major U.S. index mutual funds. A quick calculation showed that this proposed mutual fund portfolio would have annual expenses in the 0.07% range.
I then showed the prospect that his default company 401(k) retirement plan menu mutual funds averaged over 1% in annual expenses. He was convinced immediately.
Next, I showed the prospect a comparison of the last two years investment performance of the mutual funds he currently owned versus the proposed U.S. index mutual funds. He actually responded, “How do I sign up with you?”
At a minimum, your current default company 401(k) retirement plan menu includes the S&P 500 index mutual fund option. That mutual fund would be a good place to start in order to lower your annual costs.
Keep in mind that you can build your own low-cost and better-performing U.S. stock market index mutual fund portfolio like this one with a self-directed brokerage account option.
Ric Lager
Lager & Company, Inc.
