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Saturday, May 14, 2011

Does Your 401k Offer Low Cost Index Funds?

DIY Investor recently looked at the offerings for his youngest daughter's 401k and shared his thinking on fund choices and asset allocation. The critical factor in this whole process, when it got to the actual fund-picking point, was fund expense. Over and above everything else, over the long term, fund expense influences bottom line performance. Simply put, choosing lower expense funds can mean big bucks over the long term. As it turns out, the lowest expense funds are typically index funds because, simply, you are not hiring managers to make buy/sell decisions and do a lot of research. In the case of my daughter's 401k, Fidelity's Spartan Funds fit the bill.

What should the reader get out of all of this? First, pay attention to the benefits package when considering a job. Immediate pay  may not be the most important consideration. This is lost sometimes on young people, and  they literally pay a huge price later. Secondly, if you are in a job and appropriate 401k choices are not offered, talk to Human Resources and see if you can get changes. Very simply, you should be offered at least 3 low-cost index funds for the following market segments: overall stock market, international stocks, U.S. bond market.

Some really good background on all of this is provided by Ron Lieber of the New York Times in "Why 401 (k)'s Should Offer Index Funds."  According to Lieber, only 37% of 401ks offer all three of the index funds mentioned. Also, understand that the fund administrators at your company are fiduciaries. ERISA explicitly states that they are legally bound to take into account plan expenses in selecting investment options.
Posted by Robert Wasilewski at 7:25 AM
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4 comments:

  1. MoneyConeMay 14, 2011 at 9:45 AM

    Not mine! He actually laughed when I asked why there wasn't a S&P 500 fund. (At that time s&p was at its bottom).

    ReplyDelete
  2. DIY InvestorMay 14, 2011 at 12:31 PM

    re:MoneyCone Very interesting because in the future there will be lawsuits over exactly this issue!

    ReplyDelete
  3. ChadMay 14, 2011 at 12:48 PM

    My company was very recently acquired by a competitor, so I've had to setup a new 401K account. I was disappointed with the new plan's fund options. There is an S&P500 index fund, but the plan doesn't have any index fund option in the other market segments you mention.

    However, the plan (through Fidelity) does offer a "brokeragelink" option which allows access the full range of Fidelity fund options if you fill out some additional forms. So, with a little extra work, I can get the index funds I want, but I think it is unfortunate that more low-cost options are not offered with the standard choices. I'm going to send a note to the HR team and I will include a link to the NYT article you provided.

    ReplyDelete
  4. DIY InvestorMay 14, 2011 at 4:11 PM

    re:Chad I'm glad you are pro active on this important issue. Also, FYI you probably were given an opportunity to rollover your old 401k to an IRA. I would do that and then you can choose from a much wider range.

    ReplyDelete

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