December is always a month when you have a little “down time.” That is the time you can use to update your 401(k) investment management strategy for next year.
Start with reviewing the ‘expense ratio’ in your 401(k) mutual funds. The best way to begin is to examine the mutual funds you currently own in your 401(k).
The expense ratio is found by dividing the mutual fund’s operating expenses. By the average total dollar value of all the assets in the fund. You can find the expense ratio in the prospectus of all your 401(k) mutual funds.
So, go online to your company 401k) provider. Find the page and the column that lists the .pdf documents of the mutual fund prospectus. The expense ratio should be easy to find in that document. The disclosure is required by ERISA law in your 401(k).
Remember that a 401(k) mutual fund invests in a group of securities. Purchased with money pooled from other mutual fund investors. Your 401(k) money is comingled with these other mutual fund investors.
The professional mutual fund managers pick the stocks the mutual fund owns. In basic terms, a mutual fund is a collection of individual stocks. The name of each stock and the size of the buy is up to the mutual fund manager.
The mutual fund expense ratio covers the fund’s operational costs. Expense ratios range from 0.25% to 1% annually. Expense ratios are always higher for actively managed mutual funds. These mutual funds make up most options on a default 401(k) menu.
Take a close look at the expense ratios of the index mutual funds offered in your 401(k). These mutual funds are passively managed. The only stocks they own are the ones found in the most popular stock market averages.
The annual expense ratio of an index mutual fund is around 0.49%. In some larger company 401(k) plans, the same index fund has an annual expense ratio as low as 0.03% annually.
The annual expense ratio for an actively managed mutual fund is higher than an index mutual fund. Regardless of the size of the company 401(k) plan.
The company 401(k) lawsuits recently have benefited individual 401(k) participants. These lawsuits have done an excellent job of lowering the annual expense ratios in company 401(k) mutual funds.
It makes no sense to pay excessive costs to own any 401(k) mutual funds. The highest cost mutual funds usually come with the worst annual investment performance.
Get the annual investment performance you are paying for. Or lately, some amount of preservation of your 401(k) principal. That starts with a quick review of your 401(k) mutual fund expense ratios.
Ric Lager
Lager & Company, Inc.
