The mutual fund on your 401(k) retirement plan menu is always listed in alphabetical order.
Well, there is a research report a couple of years ago that confirmed that fact. And it found that mutual fund names beginning “early in the alphabet” are more likely to picked.
The first four mutual funds listed on a 401(k) retirement plan menu receive an average of 10% more money each. Mutual funds listed 11th or lower receive 10% less 401(k) contributions.
The average default 401(k) retirement plan mutual fund menu offers 19 mutual fund options. The report’s conclusions are no surprise. The more likely 401(k) participants are to choose the mutual funds at the top of the alphabetical list.
Academic research has found “alphabeticity bias” in 401(k) plan mutual fund selection.
Individual 401(k) participants do not spend enough time picking their mutual funds. They do not read mutual fund descriptions. They do not sort out the best-performing and lowest cost funds.
There are three important company 401(k) mutual fund characteristics. Two are easy to find. The third one is harder to find but is the most important ranking characteristic.
The first important mutual fund ranking option is annual fees and expenses. Find the annual costs of owning your 401(k) mutual funds. There is a huge gap in what it costs to own the diverse types of mutual funds found on your company 401(k) menu.
It is especially important to “get what you pay for” when you own any mutual fund in your company 401(k).
The second critical point is the 401(k) mutual fund annual investment performance. Each individual 401(k) retirement plan is different. Index mutual funds stand out on one menu. In another, a managed mutual funds are the best option.
Read the mutual fund description of the types of stocks and market sectors it owns. Focus on the type and style of 401(k) mutual fund best to own now.
Annual performance information is available on your 401(k) retirement plan web site. Annual performance is a required disclose. So are annual fees and expenses.
The last important company 401(k) mutual fund ranking characteristic is relative strength. This measurement ranks the investment performance of each 401(k) mutual fund. And ranks every 401(k) mutual fund against every other mutual fund option available to you.
Think fantasy football or the NCAA men’s basketball tournament bracket. Each of your default 401(k) mutual funds ranked or seeded the same way. Compare one fund to another. At that point, the top two or three 401(k) mutual funds you should own stand out by a mile.
Ric Lager
Lager & Company, Inc.
