Here's the difference between decisions made by 401(k) plan sponsors and the decisions you make for your individual portfolio: Your lack of investment knowledge will affect only your portfolio. The poor decisions made by 95 percent (or more) of 401(k) plan sponsors can destroy the retirement goals of millions of American employees.
I meet with many 401(k) plan sponsors. They all tell me the same thing. Their broker or insurance company claims to have the ability to select actively managed funds that will outperform the indexes. My response is simple: Show me the data. Start by showing me the funds they have selected in the past, with the dates when they entered and exited the funds. If they have this ability, you would assume most of those funds beat the benchmark. I have never received this information.
Here's another question you should ask: How have the proprietary mutual funds (the ones that have the name of the brokerage firm in the name of the fund) performed against their benchmarks? If a broker tells you he can pick fund winners, you would think their branded funds would have a long track record of routinely outperforming their benchmarks. Be sure to get at least ten years of performance data.
Let's put the daunting task of picking fund "winners" in perspective. How hard do you think it is for the most sophisticated fund managers in the world to beat the S&P 500 index, when that is their designated benchmark? It must be harder than it looks because less than 40 percent of these funds do so in any given year according to a study by Standard and Poors.
Presumably, each of the losing fund managers had every expectation of beating their benchmark at the beginning of the year. How likely is it that a broker could predict in advance that the fund manager would fail to meet this goal? Do brokers know something that has eluded these fund managers and their employers?
Many state pension funds retain brokers with this purported expertise to advise their plans. They are understandably eager to reap the extra returns promised by these "experts". How has that worked out?
Not well. A comprehensive study compared the long term results of state pension plans with index based portfolios of comparable risk. Almost all of the plans underperformed.
The problem is not lack of data. It's that plan sponsors are not aware of the data and brokers want to keep them in the dark. Burton Malkiel, in his seminal book, A Random Walk Down Wall Street, reviewed the research and concluded that "It does not appear that one can fashion a dependable strategy of generating excess returns based on a belief that long-run mutual fund returns are persistent." The problem is not that no actively managed funds outperform. Some do. The issue is whether anyone has the expertise to pick them in advance.
Financial author and blogger Richard A. Ferri computed the odds of picking a fund that would beat the benchmark and found they were 2 to 1 against doing so. Ferri concluded: "The odds are against picking a winning fund, and the payouts don't justify the risk."
I can find no credible data supporting the inclusion of actively managed funds in 401(k) plans or individual portfolios. Yet, the securities industry is so clever and its advertising is so overwhelming, that these funds dominate the investment options in most plans. The cost to plan participants is staggering.
The system needs a complete overhaul.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of "The Smartest Investment Book You'll Ever Read," "The Smartest 401(k) Book You'll Ever Read," "The Smartest Retirement Book You'll Ever Read" and "The Smartest Portfolio You'll Ever Own." His new book is "The Smartest Money Book You'll Ever Read." The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
Follow Dan Solin on Twitter: www.twitter.com/DanSolin
Jason Alderman: Knowing Which Financial Records to Save, Toss
The only thing that drives stock price is how many people buy the stock. Even if some companies post poor profits, the stock may go up, or some companies post nice profits but they didn't meet the expectations so they go down.
It really is a crazy system to invest ones retirement into.
Just for clarification, I am one of those people that has no idea what I am doing with my 401k. But I do remember being sold on managed funds that will return 9% or more per year. Now it seem that the only way my account goes up is because I keep adding money every week.
The body of the article does not merit this conclusion.
The article points out ( rightly ) that choosing managed funds over indexes is a fools game.
If foolishness is to be regulated against, then the system needs to be tweaked to disallow managed funds.
If foolishness is to be accepted as part of the human condition and participants allowed to act foolishly, then the system needs to be tweaked to assure that index funds are included as an option.
The system itself is designed to encourage savings for retirement by sheltering income from income tax.
Unless we're ready to scrap the income tax system and it's inherent behavior encouragement via the tax code, it's working as designed.
Were I to walk up to you and tell you you were now going to have to pay for something you were getting free you would say no.
But were I to tell you you would essentially be signing up for a paycut to manage investments you were clueless as to how to manage you'd think I were crazy.
Still people bought into it. Financed the conversion with their own money. Smiled when some employer offered to match dollar for dollar what use to be his alone to pay. Sad really.
The other thing about
The untold story around pension managed funds is they were gambling with your money like it was free. Some were reaching for 10,15 percent return when they were only on the hook for risk plus inflation to pensioners as best. They were hoping to pocket the difference and when the downturn of 2002 hit and later the mortgage crisis of 2008 they were caught out. Bad management in both cases. Greedy little buggers deserved to take a bath.
Thing is now they are running around crying about pensioners living to long. That wasn't the problem. Guess their solution for mismanaging the money is to throw old people out in the snow. That wouldn't fix the problem of them being bad at their job.