If you look hard enough, there is likely an academic study for a topic of interest. I found a great article last week about the problems picking individual company 401(k) mutual funds.
A market research firm teamed-up with three university professors to analyze the company 401(k) mutual fund choices of nearly 7,000 companies. The findings of this study are not surprising.
The default listing of mutual fund options on most company 401(k) retirement plan menus is alphabetical. The study found that the order of the list of mutual funds has a big influence on which mutual funds you choose in your 401(k).
The mutual funds towards the top of the alphabetical list get chosen first and more often. No surprise there. This finding is another example of the lazy decision making put in by most individual company 401(k) retirement plan participants.
There is another company 401(k) mutual fund selection problem referred to in this article. That is the practice of choosing 401(k) mutual funds by annual mutual fund expenses. It turns out that investment management strategy is no better for picking your company 401(k) mutual funds.
It is a shame that the authors of this study were not made aware of an independent, unemotional, and unbiased mutual fund ranking resource.
For my individual company 401(k) investment advice clients, I rank their company 401(k) mutual fund options using an independent, third-party mutual fund scoring system. This system calculates positive or negative trends, investment performance versus the overall stock market indices, and investment performance versus mutual fund peers.
The money market or stable account option is also ranked. In mid-December, the safety of the money market began to be ranked higher than most stock market mutual fund options.
When the preservation of principal option on your company 401(k) mutual fund menu is higher ranked than the stock market mutual funds, there is a very easy investment management decision to make. Lower your stock market risk.
The safety of the money market in mid-December was a better investment option than the broad U.S. stock markets. In a timely manner, my company 401(k) advice clients took the necessary steps to preserve as much of their retirement plan principal as their risk levels allowed.
Ranking company 401(k) retirement plan mutual funds alphabetically or by annual expenses in full of emotions and human error. These methods of selecting 401(k) mutual funds are no match for a clearly declining stock market environment.
There is investment management technology available today that rank your company 401(k) retirement plan mutual funds by the only investment performance factors that really matter. These tools also can keep your company 401(k) retirement plan principal safe with stock market risk is necessary.
Ric Lager
Lager & Company, Inc.
