3 Reasons Your 401(k) Choices May Not Include the Best Mutual Funds to Buy

The financial news in August 2015 was bleak. Stocks tumbled over the devaluation of the Yuan and other worries, 401(k) values tumbled as well. While the losses are strictly “on paper,” the fear is there. Unfortunately, your 401(k) may be losing money for reasons other than the stock market because it may not give you the choice of the best mutual funds to buy.

Many mutual fund companies administer 401(k) plans as well as decide which types of mutual funds will be the investment vehicles for those plans. According to research recently released by the Center for Retirement Research at Boston College, this conflict of interest occurs frequently and is often decided in favor of the investment firm. This occurs despite the ERISA rules that explicitly state that anyone managing a retirement plan must make decisions for the “exclusive benefit” of participants and beneficiaries of the plan (smarthr.blogs.thompson.com).

Why My 401(k) Choices May Not Be the Best Mutual Funds to Buy

1. A Detectable Mutual Fund Choice Bias

When plan sponsors decide to change investment options in a plan, the fund’s priority may not be to find the best mutual funds to buy, but there may be other factors in their decision-making. The company often exchanges mutual funds from another investment company in favor of mutual funds from their own portfolio. The types of mutual funds brought on board often don’t have the best mutual fund rating and don’t have much hope of improving their performance. Any investor who reads the returns will steer clear of that investment and try to muddle through with the remaining investment options. What the investment company believes is the best mutual fund and what the best mutual fund for participants really can be two distinctly different investments.

The big fund companies, such as Vanguard and Fidelity, serve as both fund manager and investment advisor. Some fund companies even act as trustees of the plan, leaving the employer as mostly hands off. This allows fund companies to add and delete funds at their discretion. Despite the expectation of a wide range of risk and investment options that are suitable to the participants and the plan, many companies forego their fiduciary responsibility and simply place their own funds as suitable options. Many of these funds are not low risk mutual funds and carry a higher risk of loss. Of the $4.7 trillion of defined contribution assets in the US, 56 percent of them are managed by big fund companies.

2. The Fiduciary Responsibility Debate and Your Mutual Fund Options

Similarly, the Department of Labor recently held hearings to investigate whether financial advisors who work with America’s retirement accounts should be held to the same fiduciary standard as plan sponsors. The fiduciary standard means that the participants’ interests come first. The DOL believes that holding brokers to a fiduciary standard would prevent the brokers from placing plan participants in investments with high fees.

Representatives for the financial services industry dislike the idea of brokers having fiduciary responsibility since it would increase their liability and discourage brokers from working with smaller plans. Obviously fund managers who act as plan trustees should be taking a responsible approach to investing, if for no other reason than to act within their fiduciary responsibilities. Currently, however, little is being done by the government to ensure investment companies act responsibly.

The issue with fiduciary responsibility has more to do with employers who ignore the investment issues of the plans. That means plan participants are often stuck with lousy investment choices because employers fail work with brokers to get good investments. When fund companies manage investment choices, they remove an average of 13.7 percent of their own underachieving funds annually, while they remove 25 percent of funds from other fund companies.

When employers give fund companies this much control, they open themselves up to litigation by participants and beneficiaries. If the participants can prove the sponsor ignored or was unaware of the performance of funds within the plan, the sponsor can be held liable for losses in the plan.

3. Participant Attitudes

The fault does not lie strictly with fund companies and plan sponsors. Participants tend to take a lackadaisical attitude toward their 401(k) investments believing that either the employer or fund manager has some sort of fiduciary duty and selected the best mutual funds to buy and meet the participants’ needs and they need to make the best of them.

This leaves plan participants in the position of having to actively manage their own 401(k) funds, despite most participants not having the knowledge required to effectively do so. Since it’s your retirement on the line, you have to be your own advocate and look at the fees charged on the fund as well as its performance history. Ask yourself how well the fund fits with your investment objectives for your retirement savings and whether it falls into a class of low risk mutual funds that could be best mutual funds to buy for you.

Plan costs are considered high when they exceed 1.5 percent of assets and don’t provide the returns to justify the costs; if you pay higher fees and the consistent outperforming returns warrant a higher fee, then there is no problem. It is when mutual funds charge higher fees and do not outperform. When high fees combined with poor investment choices, it’s time to consider other options. If your employer offers a match, you want to contribute enough to receive your maximum match since it doesn’t make sense to leave money on the table. However, once you’ve done that, look at ways besides your 401(k) to maximize your retirement investment. Is your spouse’s plan better than yours? Maximize your savings there. Opening an IRA and directing your own investments using the best mutual funds to buy to meet your goals is another way to maximize retirement savings.

The conflict of interest argument in Washington isn’t likely to find a resolution soon. The only way to make sure you have enough money to retire comfortably is to be your own advocate and control your own investments and know what types of mutual funds will best meet your goals. Finding the best mutual funds to buy can be difficult. Call an expert to be your advocate. Does your 401(k) plan need a review? Contact us at 1-888-938-38721-888-938-3872 FREE+18889383872+18889383872 FREE“>1-888-938-38721-888-938-3872 FREE FREE for a free 30 minute consultation. We’ll give you an honest assessment and help you find the right investment mix for you. At minimum, your retirement deserves a 2nd opinion from an expert.

1. crr.bc.edu/briefs/are-401k-investment-menus-set-solely-for-plan-participants/
2. time.com/money/3722080/proposed-retiree-safeguard-is-long-overdue/
3. finra.org/investors/investing-your-401k
4. smarthr.blogs.thompson.com/2015/08/18/mutual-fund-companies-often-put-their-interests-first-in-401k-menus/
5. forbes.com/sites/ashleaebeling/2015/08/18/is-your-401k-fund-line-up-biased/

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