Managing the default menu of mutual fund options in your company 401(k) retirement plan account can be an intimidating. You did not pick the mutual funds. Your company did not pick the mutual funds; they just approved the mutual fund menu recommended to them by a consultant.
Literally, you have to “make lemonade out of the lemons.” No pressure; it’s just your retirement savings invested at all-time stock market highs and near all-time interest rate lows.
How many times in your working career have you read or heard about the merits of “diversification” when managing your investments? Diversification is the ability to mitigate investment risk. True believers even make statements about improving investment returns when invested in a broad range of assets classes.
Forget the company 401(k) retirement plan “educational” propaganda. Also useless is the mutual fund industry mantra on the same topics. Let’s face the facts about your existing company 401(k) retirement plan mutual fund menu.
The exact number of mutual funds you should own in your company 401(k) retirement plan account is based on two main criteria. First is annual cost.
Company 401(k) mutual fund costs have been under tremendous pressure over the last few years. Lawsuits, and their multi-million dollars judgements, have a tendency to get the attention of lackadaisical company retirement plan sponsors.
Research firm Morningstar says fund fees have fallen over the years. The average expense ratio of all U.S. open-end mutual funds has been nearly cut in half over the past two decades, from 0.87% in 1999 to 0.45% in 2019.
Subtract the mutual fund annual fees from the annual investment performance. This calculation is the first step to finding out if you are in fact receiving enough annual investment performance to justify your annual costs of owning any 401(k) mutual fund.
The second criteria to determine if any company 401(k) menu mutual fund is worthy of your retirement money is the investment performance ranking. If you try to manage your company 401(k) mutual fund menu on your own, the investment performance ranking can be hard to determine.
An independent, third-party investment advisor is a good source of a mutual fund ranking analysis.
Over the last few years, Large and Mid-Cap Growth mutual funds have been the best-performing mutual funds on any company 401(k) retirement plan menu. Those mutual funds have owned a large percentage of the Google, Amazon, Microsoft, and Facebook high technology stocks.
The more your company 401(k) has been invested outside of those two mutual fund assets classes, the more your investment returns have lagged.
Don’t fall into this company 401(k) investment management trap. You take all the risks associated with being 100% invested in the stock market at all times. You pay higher annual costs, and receive less annual investment returns for your lack of mutual fund analysis and information.
The majority of individual company 401(k) retirement plan participant’s investment returns have lagged the popular stock market averages over the last few years because they have over-diversified their mutual fund holdings. Which leads right back to the diversification issue.
It’s very easy to over-diversify your company 401(k) plan mutual funds right out of meaningful long-term investment performance success. This is the second trap that comes with owning the most expensive, and poorest performing mutual funds on your company 401(k) menu.
Don’t fall into either trap.
Ric Lager
Lager & Company, Inc.
