We have analyzed near 50 different 401k plans (and other retirement type plans) and we can say unequivocally that there are good plans and not so good plans. What makes the difference between the two? In a word, four things; low cost, wide diversification, no fads, and best in class.
The chart on page three compares only 20 plans and shows the best, the average, and the worst plan returns using our rotation strategy based on C, the risk-adjusted relative performance metric.
To be sure, the worst plan in the rotation back test outperformed the traditional advice of “buy and hold and hope”, but there is still thousands of dollars difference for participants with the best plan. Clearly, right strategy, but what else helps?
- Low cost As I’ve talked about the last couple of months, if you are going to use index funds in your retirement plan, then use the low cost provider. There is no reason to pay more for the same vehicle. It’s like a car. You can buy a brand new car called Index for $100 or you can buy one for $500. This difference costs you each and every year you drive it. Why would someone do that?
- Wide diversification The best plans have a wide variety of choices. These range from the obvious like domestic and international, or stocks and bonds and balanced, to the not so obvious like real estate and commodities like precious metals.
- No fads Fads have such an allure that they are hard to resist, but they can be so detrimental to successful long-term investing. I just mentioned wide diversification, but this doesn’t mean providing fad type funds that have no better claim to success than it worked last year.
- Best in class This means your plan has the funds that are providing the most return for the risk taken. Index funds that invest in the same pool, like the S&P 500, take the same risk, but because of lower expenses, the returns are higher. Likewise with active funds where there can be major differences.
So, what can be done about improving your plan, indeed your chances of increasing your nest egg? Have your HR or 401k committee call us to schedule a review 800-800-6563. Or email us for more information at info@401kSelections.com.
Stephen L. McKee