Like many things in the investment management world. Selecting 401(k) mutual funds comes down to a basic math problem.
The answer to the “what to buy?” question is solved by ranking your 401(k) mutual funds by annual costs. Then by annual investment performance.
Why don’t individual 401(k) participants pay more attention to the mutual funds they own? Because they never take the time to calculate how much it costs them to continue to own the wrong mutual funds.
Here is the 401(k) investment management term for this issue. It is “the cost of the problem.” This calculation is the dollar amount 401(k) account value it has cost you to own the wrong mutual funds.
The best thing about this number is the “in your face” factor. There is no marketing gibberish or financial industry jargon. “The cost of the problem” is the bottom-line dollar amount of money you could have now in your 401(k). But do not.
So, how do you know “the cost of the problem” in your 401(k) account now?
The calculation of your 401(k) “cost of the problem” is a two-part process. First is the analysis of your default 401(k) mutual fund annual fees.
Second is ranking the investment performance of those same mutual funds.
An independent, third-party, fiduciary-level investment advisor can best provide this information. He or she has access to sophisticated mutual fund analytical tools. These are independent databases that have no products to sell. Only historical data.
The key element of the “cost of the problem” calculation in your 401(k) is to determine the size of the problem. Is the dollar amount of the problem high enough for you to spend the time and money to fix it?
Is the cost of the solution much higher than the dollar amount of the problem?
The annual investment advisory fee my 401(k) advice clients pay is lower than their “cost of the problem.” In every solitary case.
I am a fee-only investment adviser. I have no affiliation with your company 401(k) retirement plan sponsor (your company). Or your company 401(k) provider (Schwab, Fidelity, Vanguard, etc.).
A ‘cost of the problem” calculation can help reduce your annual 401(k) mutual fund fees. And improve annual investment performance.
It will also provide peace of mind. You will never guess at “what to buy” in your 401(k) account. What is that worth to you?
The “cost of the problem” calculation has one more important benefit. It can go a long way toward the preservation of your 401(k) principal. An especially important investment management strategy over the last few months.
Ric Lager
Lager & Company, Inc.
