1/16/2013 6:45 PM ET|
Dumb 401k mistakes you can't avoid
Your company’s 401k plan administrator likely isn’t giving you access to the best mutual funds for your investment dollar.
The folks responsible for picking the mutual funds for your 401k are apparently making the same dumb mistakes that average investors make -- they're chasing hot funds, too.
And this could be a big problem, according to a new report from the Center for Retirement Research at Boston College.
Two important decisions have to be made with 401k plans:
● Administrators have to review and select which mutual funds to offer employees.
● Workers then have to pick from that list which funds to invest in for retirement.
The researchers discovered that employers select mutual funds that perform better than comparable, randomly selected funds, but worse than passive index funds. They also found that participants don't add any value through their own decisions.
In other words, plan administrators aren't doing a very good of selecting funds, and that's not helping workers, who are already prone to making poor investment choices and decisions.
What's more, when replacing funds inside a 401k, plan administrators tend to do the very same thing that plan participants do: They chase hot funds.
Now lest you think that plan administrators are no better than monkeys throwing darts at a wall of mutual fund ticker symbols, the researchers did note that plan administrators are selecting funds that are better performers than a random set of funds.
And that's largely because the funds they select have lower fees than the random set. "Lower fees, by definition, improve returns by leaving more money in the investor's account," the researchers wrote.
Still, plan administrators could do a better job of helping their workers save for retirement by picking better funds. In fact, the researchers suggested that plan administrators ought to consider selecting passive funds rather than active options for their 401k plan, and that by doing so the overall performance of the funds in their plans would be improved.
What do the experts say in response to CRR's research? What might plan administrators and plan participants do or not do because of the findings?
Lobby for passive funds
Since the study clearly concludes that "lower investment fees are a large part of the explanation for the superior performance of the employer selections," Rick Meigs, the president of 401khelpcenter.com, said, employees should be lobbying their employees for a selection of low-cost index funds.
"Not only will the employee obtain lower-cost funds, but they eliminate the mistake of chasing rates of return, which often happens with a selection of actively managed funds," Meigs said. "If the plan already has passive options, employees should use them."
And if the employer won't add passive funds, Meigs said, employees should then choose a balanced or target-date fund where asset allocation is being performed for them by the active manager. "This reduces the propensity of employees to chase returns," he said.
Don't chase hot funds
Others say that 401k participants should develop diversified portfolios using different asset classes that fit their risk tolerance. "Done correctly, your portfolio will need little if any tweaking over the course of a year," said Michael Stillman, a senior vice president with International Research and Asset Management. "Appreciate how natural it is for your funds to move in opposite directions. This is the nature of being diversified."
Stillman also cautioned plan participants against chasing performance. "Don't allow emotions to get the better of you and cause you to make unnecessary changes," he said. "If you are making multiple fund changes throughout the year, you should probably adjust to a less aggressive allocation."
More from MarketWatch:
VIDEO ON MSN MONEY
Do yourselves a favor: Go read the principles of John Bogle, the fouder of Vanguard, who initiated index funds and low fees.
You can find a wealth of information at Vanguard, or at the bogleheads blog-site.
I have been saving for retirement at Vanguard for well over a decade, and I'm extremely satisfied. You are an owner, by being an investor; no profits for fat-heads upstairs. Vanguard is now number 1, and everyone else is chasing the 'low-fee' approach.
Best of luck to you all, I know it can be tough.
I simply feel this is a great firm to have on my team...
Biggest mistake is giving Wall Street manipulators your 401k savings to (Gamble) play with..
Then there are the Account Administrators who skim your money off the top...
The first mistake is NOT saving for retirement. I smile every month I send my check to the mutual fund company. I know someday I will be done working. The second mistake is not starting early enough. I started when I was 21 in an IRA account. $2000 Dollars a year. I used my tax returns, plus a little extra to get that each year. Yes, I sacrificed each year to do this, especially when the kids were little. But you must pay yourself first, if you want to WIN.
Contact a mutual fund company that sells NO Load funds. Vanguard, American Century Investors, etc. The earlier you start, the quicker you get the magic word working for you. That word is COMPOUNDING. Interest added to your principal investment each month grows to a larger number each month. Over time you aim for 8 to 10 % annual growth. I control my investment choices. Then diversify between growth stock funds, international funds, and small cap funds. Read a good book on mutual funds, and how they work. Read Money, Kiplingers magazines. Over time you will get excited as to how much it grows. In five years that initial 10,000 will grow to about 15,000. The key is to educate yourself on this, and STICK with it. Invest the same amount each month. Don't depend on other people to do it for you, you must educate yourself to win.
If you leave your company, roll your 401K into an IRA account. Do not touch the money. The penalties and taxes will only make the government rich. Invest in the IRA in good growth mutual funds. I have done this for over 25 years, and I'm well towards my goal. Good Luck.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market ended the holiday-shortened week on a mixed note as the Dow Jones Industrial Average shed 0.1%, while the S&P 500 added 0.1% with seven sectors posting gains.
Equity indices faced an uphill climb from the opening bell after disappointing quarterly results from Google (GOOG 536.10, -20.44) and IBM (IBM 190.04, -6.36) weighed on the early sentiment. Google reported earnings $0.15 below the Capital IQ consensus estimate on revenue of $15.42 ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'