how employer's fund selection affects 401k performance
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how employer's fund selection affects 401k performance
http://www.cbsnews.com/8301-505123_162- ... your-401k/
Hopefully your employer does the right thing and offers low cost, passively managed funds
Best wishes
Larry
Hopefully your employer does the right thing and offers low cost, passively managed funds
Best wishes
Larry
- Random Musings
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Re: how employer's fund selection affects 401k performance
100% on that, the only problem that remains is the behavioral issue of certain employees chasing "hot" index/passive funds. My employer only offers index domestic funds, but nothing on bonds (PIMCO is the best choice) and high ER int'l. I've tried, but it falls on deaf ears since they play the "dump the bad ones, add good ones" game as mentioned in the report.larryswedroe wrote:http://www.cbsnews.com/8301-505123_162- ... your-401k/
Hopefully your employer does the right thing and offers low cost, passively managed funds
Best wishes
Larry
RM
I figure the odds be fifty-fifty I just might have something to say. FZ
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Re: how employer's fund selection affects 401k performance
RM
That problem can be solved by offering lifestyle or risk target portfolios that are well diversified and rebalance automatically
Larry
That problem can be solved by offering lifestyle or risk target portfolios that are well diversified and rebalance automatically
Larry
- Random Musings
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Re: how employer's fund selection affects 401k performance
I agree those can be good choices. However, the reality is that many plans today offer those and individual fund choices. You can lead a horse to water, but there are always those who chase performance, be it active or index/passive. There are certain people at my workplace who have spreadsheets and do it, they boast about it until their "models" don't work.larryswedroe wrote:RM
That problem can be solved by offering lifestyle or risk target portfolios that are well diversified and rebalance automatically
Larry
Only having risk target portfolio's seems attractive, but at the least you would need the gamut of choices 100/0 to 0/100, the latter in case of investors who need to have all bonds in that bucket due to other constraints. And costs would have to be low as well if the switch is made to offer only risk target portfolio's, for that may not benefit more educated investors who have to opportunity to cherry pick certain individual fund choices in order to best optimize total portfolio ER with need of risk. That type of analysis is done frequently on this board - the search for the less offensive 401k/b offerings.
Essentially, reform is needed to benefit the investor and it never really seems to come. When I mean reform, I also include the (typically) HR group and company officers who represent the company as well.
Regards,
RM
I figure the odds be fifty-fifty I just might have something to say. FZ
Re: how employer's fund selection affects 401k performance
Great post! This thread is now linked to the wiki article Setting up a 401(k) plan . You can find the link under Forum Discussions.
Frank R. Cirullo |
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"It isn't what we don't know that gives us trouble, it's what we know that ain't so." -- |
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Choosing Participants Over Providers
The thread could be effectively renamed how Employer selection of providers and funds transfers participant assets to providers and financial advisors. There are no accidents or errors in the 401K system from the standpoint of the provider, just clever people maneuvering events to enrich providers at the expense of plan participants.Random Musings wrote:Essentially, reform is needed to benefit the investor and it never really seems to come. When I mean reform, I also include the (typically) HR group and company officers who represent the company as well.
IMHO, the answer is to keep things simple, by removing the harmful confusion and complexity added to the mix by the high-cost providers. After being frustrated at some prior employers, at my current employer, I proposed using EF as a provider (record keeper and I think also our TPA), and providing a fund selection from Vanguard that mimics the fund lineup provided in the Federal Thrift Savings Plan, which includes about six target Date funds, which are weighted combinations of the other funds. This plan is now in effect.
Reform at the level of the industry or govt will be slow in coming, and may or may not help. Happily though, even with current law, it's possible to bypass the snares and foils of this industry and just invest in low-cost funds in a tax-deferred account, or if desired, a Roth account. The 401K industry makes this process more difficult than it should be. However, the good news is that it's possible to overcome the influence of the financial/insurance industry and operate in the best interests of the participants.
Re: how employer's fund selection affects 401k performance
Good article Larry!
I am lucky that my current employer offers 4 Vanguard index funds + TIPS in the institutional class (equivalent or lower expenses than Admiral class). We do get nicked for a "record keeping fee" but it isn't huge. The other options are a series of 10 target retirement funds through Blackrock (which invest in actively managed funds) as well as a bunch of actively managed funds, a stable value fund and of course company stock. There are a mind boggling 30 total choices available in our 401k.
I restrict my investment to the Vanguard funds, but based on the number of people who track the company stock closely, I would assume that I am in the minority.
C
I am lucky that my current employer offers 4 Vanguard index funds + TIPS in the institutional class (equivalent or lower expenses than Admiral class). We do get nicked for a "record keeping fee" but it isn't huge. The other options are a series of 10 target retirement funds through Blackrock (which invest in actively managed funds) as well as a bunch of actively managed funds, a stable value fund and of course company stock. There are a mind boggling 30 total choices available in our 401k.
I restrict my investment to the Vanguard funds, but based on the number of people who track the company stock closely, I would assume that I am in the minority.
C
Re: how employer's fund selection affects 401k performance
exc. article Larry!
I've tried for years to get more index funds offered in our 401k (managed by metlife) without success. We do have target retirement funds (all t rowe price) but high expense ratios, other funds are actively managed and no other index funds. Fortunately, we have the option of putting half of our 401ks in a self-managed account, so I can go vanguard there.
http://www.brightscope.com is an eye opener as it rates a huge number of the 401k plans in the US, was dismayed to find ours was low average.
To be fair, our 401k manager offers investment seminars and such, but most of our employees have little/no interest in it. Discouraging as 50% are nurses an other health care professionals.
Chris
I've tried for years to get more index funds offered in our 401k (managed by metlife) without success. We do have target retirement funds (all t rowe price) but high expense ratios, other funds are actively managed and no other index funds. Fortunately, we have the option of putting half of our 401ks in a self-managed account, so I can go vanguard there.
http://www.brightscope.com is an eye opener as it rates a huge number of the 401k plans in the US, was dismayed to find ours was low average.
To be fair, our 401k manager offers investment seminars and such, but most of our employees have little/no interest in it. Discouraging as 50% are nurses an other health care professionals.
Chris
Re: how employer's fund selection affects 401k performance
Following fcirullo, this thread is now in the Personal Finance (Not Investing) forum (401(k)).fcirullo wrote:Great post! This thread is now linked to the wiki article Setting up a 401(k) plan . You can find the link under Forum Discussions.
To those who want to fix a bad 401(k), the wiki can help: How to Campaign for a Better 401(k) Plan
Re: Choosing Participants Over Providers
Lawman-congratulations on your victory!!!lawman3966 wrote:The thread could be effectively renamed how Employer selection of providers and funds transfers participant assets to providers and financial advisors. There are no accidents or errors in the 401K system from the standpoint of the provider, just clever people maneuvering events to enrich providers at the expense of plan participants.Random Musings wrote:Essentially, reform is needed to benefit the investor and it never really seems to come. When I mean reform, I also include the (typically) HR group and company officers who represent the company as well.
IMHO, the answer is to keep things simple, by removing the harmful confusion and complexity added to the mix by the high-cost providers. After being frustrated at some prior employers, at my current employer, I proposed using EF as a provider (record keeper and I think also our TPA), and providing a fund selection from Vanguard that mimics the fund lineup provided in the Federal Thrift Savings Plan, which includes about six target Date funds, which are weighted combinations of the other funds. This plan is now in effect.
Reform at the level of the industry or govt will be slow in coming, and may or may not help. Happily though, even with current law, it's possible to bypass the snares and foils of this industry and just invest in low-cost funds in a tax-deferred account, or if desired, a Roth account. The 401K industry makes this process more difficult than it should be. However, the good news is that it's possible to overcome the influence of the financial/insurance industry and operate in the best interests of the participants.
We recently managed to shift our plan from fidelity actively managed to vanguard index. I worry that we still have too many funds. When we left fidelity, vanguard recommended that we map every fidelity fund to a corresponding vanguard fund. I think that way you get more legal protection against being sued. But for example, we've ended up with both the s&p 500 index fund and the total stock market index fund- seems like unnecessary over choice, the kind that Larry mentions in his article.
The blame for our original fidelity mess goes back to our HR guys who set up the plan. HR people are usually very nice and almost always spectacularly unqualified to be a fiduciary for a 401k plan. ERISA actually says that you need to be qualified and that if you are not qualified you need to get outside advice-i.e. Get a consultant. Not sure how often that happens. Even if it does, you run into the principal/agent problem. The agent/consultant is not fully aligned with the plan sponsor but often has other incentives that make him more aligned with the mutual fund industry.
For example I just went to a conference chock full of fund firms and "consultants". There was lots of talk about the value of active management, etc. no discussion of issues like survivorship bias, fund incubation etc. The way these conferences work, they are free for the plan sponsors, and paid for by, you guessed it, the mutual fund companies.
Follow the money!
Cheers,
RIP Mr. Bogle.
Re: how employer's fund selection affects 401k performance
Nice article Larry- simple, clear, and to the point.larryswedroe wrote:http://www.cbsnews.com/8301-505123_162- ... your-401k/
Hopefully your employer does the right thing and offers low cost, passively managed funds
Best wishes
Larry
Cheers,
RIP Mr. Bogle.