I’ve written before about my 401K. Every quarter or so I get this really detailed 401K statement from our 401K administrator which cracks me up because it is such good evidence of the folly of choosing actively managed funds and performance chasing. There’s a few other little quirks that just make me shake my head too.
Overall, it isn’t too bad as a 401K. The fees aren’t that much, the ERs are high, but not ridiculous, there’s at least one very low cost index fund I can build around, and there’s a brokerage option that allows me to buy anything (although there is a $200 annual fee for that option.) I’ve definitely seen much worse 401Ks. But it does make me miss the TSP I had in the military, where everything was ultra-low cost, there were no additional fees, screw-ups with contributions were unusual, and there were 4 great index funds and the free-lunch G fund.
So, change # 1 to my 401K this year is that they’re phasing out the stable value fund. This isn’t the 401K plan administrator’s fault, it’s just that Charles Schwab has decided to liquidate the fund. This is really too bad, because these funds are often great choices in a 401K. They’re kind of similar to the TSP G fund. It’s not exactly clear why Schwab is getting out of the stable value fund business, as it is seems more profitable than it was just a couple of years ago at the height of the financial crisis. Stable value funds are way better right now than a money market fund (which are paying basically 0% right now.) So my 401K is substituting the stable value fund for a money market fund. Thanks guys, way to hook us up. You couldn’t find another stable value fund outside of Schwab, or at least a decent bond index fund to exchange it for in the plan?
Change # 2 to my 401K is that the administrator has decided to fold the Growth Fund of America into the Schwab Total Stock Market Index Fund. The administrator’s philosophy is that he can choose the good mutual fund companies and avoid the bad ones. He does this primarily through past performance data. So now that the Growth Fund of America has been doing relatively poorly, he decided to drop it. He apparently also just realized that the GFA has been a high-cost closet index fund for years. What a surprise.
I find it fascinating that the administrator continues to chase performance like this. The data that it doesn’t work is clearly right in front of him (since he sends it to me each quarter.) He ranks each fund in the plan against its peers. Of the ten funds in the plan last year, 5 did better than their peers on average, and 5 did worse. The 3 year and 5 year data looks exactly the same. My 401K money is entirely in the Schwab Total Stock Market Index Fund (which beat 72% of its peers in the last year, 85% in the last 3 years, and 80% in the last 5 years.) That’s better than all of the chosen actively managed funds have done. Obviously I have other retirement accounts (including that old TSP), so I haven’t had to use any of the other funds in the 401K yet. I probably won’t. Once the amount in the 401K is more than my allocation to TSM, I’ll probably avail myself of the brokerage option (or perhaps get on the 401K committee and try to make some real changes.)
The other interesting thing about this quarterly statement is that they compare all of the 401K participants (anonymously) to each other. The company is basically 100 emergency doctors and a few other employees. By doing nothing but put all my money into the only index fund in the plan, my investment returns are better than 72% of those at my company. Why the administrator feels this is a relevant fact to share is beyond me. I’m not sure trying to institute some competition is the best approach to running a 401K. Reporting that data probably does, however, encourage plan participants to performance chase and time the market. In fact, the paperwork accompanying the statement encourages you to come meet with the advisor if you were in the bottom 40% of the company. Never mind that most of the doctors in this plan have other retirement assets, are different ages, have different risk profiles etc. In fact, it’s likely that the 28% of plan participants that had higher returns than I did last year were invested entirely in the now-discontinued stable value fund and/or the seriously-underperforming PIMCO Total Return Bond Fund.
The best part of the form however is this statement:
How do you know your risk tolerance? If you always drive at or below the speed limit you are conservative. If you like driving 80 miles per hour (which, ironically, is the speed limit on the interstates around here), you are aggressive. If you’re somewhere in between, you’re moderate.
Seriously, if that’s how you decide on your asset allocation, you need some serious financial education.
Have you looked at your 401K statements and the paperwork accompanying them? You may be in for a shock to realize just how financially unsophisticated those running your 401K are.
Photo Credit: Charlie Cowins, CC-BY, Wikimedia