Let’s say there are two individuals who participate in the same company 401(k) retirement plan. One of these individuals could be you. The other could be your best friend at work.
You both have the same amount of time, information, and ability to choose your company 401(k) retirement plan mutual funds. How can it be that your mutual fund choices are so different?
In October of 2016, there was a Harvard Business Review story on this same dilemma. The link to the article can be found here.
The answer is that humans are unreliable decision makers. Their judgments are strongly influenced by irrelevant factors. The authors of this article have described the variability of judgements as noise.
You make necessary judgment calls in your job every day. Why are the judgement calls in your company 401(k) so much different?
You probably picked your existing company 401(k) retirement plan mutual funds many years ago. Do you remember the criteria you used to make those decisions?
If you had to start all over and pick your company 401(k) retirement plan mutual fund holdings today, you most likely would not pick the same mutual funds. There are years and years of clinical studies to confirm that fact.
Even the decisions of experts are highly variable. State of mind, emotions, and biases all come into play.
So, how can you make the best possible investment management decisions in your company 401(k) retirement plan account?
The authors of the above article suggest replacing your human decisions with a set of policies and procedures that use the same methods for each decision. They write in the article about how to “instill discipline in judgement.”
Your company 401(k) retirement plan mutual fund selection process needs a rules-based investment management process. These investment management rules will dramatically improve your company 401(k) retirement plan mutual fund selection process in two important ways.
First, you will at all times own the best-performing mutual funds available to you on your company 401(k) retirement plan menu. You will never again guess at which mutual funds to own.
Second, you will always own the mutual funds that offer the lowest annual fees. These mutual funds are many times the same ones that have the best investment performance. You will always “get what you pay for.”
There are software tools that will rank all your default company 401(k) retirement plan mutual fund options. These tools can rank by investment performance, annual costs, and investment risk.
An investment professional can help you with a logical, independent, and unbiased assessment of your current company 401(k) retirement plan mutual fund options. Your company 401(k) retirement plan investment management decisions can be solved forever.
Ric Lager
Lager & Company, Inc.
