401(k) Investments For The 99%

I recently was asked to look at a 401(k) plan for a local business that had seventy different mutual funds on the menu.  Seventy different choices?!

Business owners and financial advisers often put a lot of time and effort into choosing, monitoring and replacing  investments for the 401(k) plan.  Here is the problem:  99% of your employees (the people you have a legal obligation to) don’t really have the time or interest to evaluate all of those choices.

More is not always better.  The average 401(k) participant uses only three funds in a 401(k) plan and research shows that the more funds offered, the more confused participants become and the more apt they are to do nothing (keep their money in cash) or do too much, and simply put a little money in every single fund.

Remember that the U.S. Government’s Thrift Savings Plan (TSP) offers only five index funds and five target date funds.  If the folks that can audit your 401(k) plan only have ten funds on their entire menu, why do you need more?

My guess is that the current broker on this 401(k) plan justifys his high fees by convincing folks that he can predict the seventy best mutual funds out there.  Unfortunately, the research is clear:  He cannot.  In fact, Charles Schwab recently published interesting research (“Bridging the Gap” 2012) showing that those who where invested in simple target date mutual funds did about 3% better than those who tried  to pick their own investments.

Design your 401(k) menu for the 99%.  Choose less investment options over more.  Choose target date funds and model portfolio’s over dozens of individual funds.

Best of luck.