Morningstar Should Be Ashamed of Its 401(k) Plan

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If you would like a pension fund like plan for your employees do not follow the Morningstarmethod. Many studies prove that model risk adjusted portfolios far out perform employees choosing their own fund mix.

I feel sorry for Morningstar’s employees. The fund selections represent everything that is wrong with 401(k) plans in this country. Here are some suggestions for Morningstar’s committee. They reflect finance 101. It’s sad the committee is so clueless about them:Your Employees Need Portfolios, not funds.

Very few employees have the ability to put together a risk-adjusted portfolio from a selection of a large number of fund options. Instead of giving them twenty-three funds to choose from, why not offer globally diversified portfolios of stock and bond funds at different risk levels, ranging from conservative to aggressive?

Get rid of all your actively managed mutual funds.

How can you possibly justify having twenty-one actively managed funds and only two index funds as investment options in your plan? You create a lot of the mutual fund data, do you simply ignore it when it comes to the welfare of your employees?

The likelihood of your actively managed funds outperforming their benchmarks over a ten year period is statistically extremely small. Only about five percent of actively managed funds equal their benchmarks over a decade. It’s hard to believe your committee is using past performance as a benchmark. There is precious little data indicating that stellar performance persists. I assume you are familiar with the SEC mandated caveat that “past performance is no guarantee of future results.”

I’m sure your committee believes it’s doing something useful when it engages in the kind of analysis detailed in your article. It really is just wasting time, feeling important and populating your 401(k) plan with expensive funds likely to enrich mutual funds and reduce the returns of participants.

Success in saving for retirement, as well as all INVESTORS, is about managed portfolios not picking the right funds. We are saving for retirement not looking for the latest or hot investment.

Please comment or call to discuss how this affects you and your organization.

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