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A New Twist on the 401(k) Shell Game

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Recently, I made a proposal to the head of Human Resources at a large industrial corporation to replace its 401(k) plan. Its plan was the typical one: mostly actively managed funds, many confusing choices, high fees (both disclosed and undisclosed).

My plan was starkly different: low, fully transparent fees, no "revenue sharing" (kickbacks) from fund families to the fund advisor, a small number of low cost passively managed, pre-allocated portfolios and Target Retirement Funds.

I reviewed the data showing the folly of investing in any actively managed fund, including a recent study demonstrating that during the past five years, nearly three-fourths of active managers failed to equal -- much less beat -- their indexes. This data is consistent with many other studies which demonstrate that, over a ten year period, less than 5% of active funds will beat their index.

She was not impressed.

"Take a look at our funds", she said. Compare them to the indexes over a ten year period and show me the results.

I did so, and I was shocked by the results. Over 60% of the active funds in her plan beat the comparable indexes over the past decade. How could this be?

Then it dawned on me. With the benefit of hindsight, an ethically challenged advisor could research those funds that have a stellar historical record and add them to the plan, while dropping those that have underperformed. He could then use the data to show a dazzling long term performance, even though the "out performing" funds had only recently been added to the fund options.

To test this theory, I asked the prospective client to obtain a list of all funds that were in the plan for the past ten years, and to indicate the dates when they came in and dropped out.

Here was the response: Their current plan advisor won't provide this information.

These people are really slick. It's amazing they get away with it.

But they do. And employees are the ones who suffer.

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