This argument goes back almost as far as company 401(k) plans themselves. The logic goes as follows: since most individual mutual funds can’t beat the S&P 500 index consistently, why not just buy the S&P 500 mutual fund on your company 401(k) menu?
It turns out there are mountains of real data backing this truth of this argument. The link to the SPIVA Statistics & Reports can be found here. Over a five-year period 75% of mutual funds don’t beat their benchmark.
Here is the scary part. Those five-year numbers represent 75% of all full-time professional money managers working with teams of analysts. If these experienced investment professionals can’t outperform the S&P 500, what chance do individual company 401(k) investor have?
The good news is that you don’t have to guess any longer at which mutual funds to own in your 401(k). All you have to do to successfully grow and preserve your 401(k) monies over the long term is to stay invested in the handful of highest ranked mutual funds on your default 401(k) menu.
Why guess at “what to buy” when you can have 100% confidence? Use the widely available information in these two key mutual fund analysis categories to improve your 401(k) mutual fund choices.
First, ask your company 401(k) retirement plan sponsor (your company) for a copy of the Summary Plan Description. If you work for a small company and no one can point your in the right direction, ask your company 401(k) retirement plan provider (Schwab, Fidelity, Vanguard, etc.).
The summary plan description is an important document that tells participants what the plan provides and how it operates. One of the many required disclosures in this document is the annual fees and expenses for each 401(k) mutual fund option.
Here is the question you want answered. Am I receiving the annual investment performance that I am paying for each year to own these 401(k) mutual funds?
It’s almost a sure bet that the most expensive mutual funds to own each year are the worst-performing mutual funds over the same period.
Second, rank each of the mutual fund options on your default company 401(k) menu by investment performance. Find the longest time period available; ideally at least the last three to five years.
You can do the same thing with mutual fund asset classes. Small and mid-cap growth mutual funds have been the best to over the last few years.
This second step is where you might need some independent, third-party fiduciary level investment advice. Investment performance rankings can become complicated and have many levels of moving parts.
Ric Lager
Lager & Company, Inc.
