Why bad funds stay in your 401(k)

When you are dealing with actively managed mutual funds you will always have some bad funds in your portfolio. The thought that someone can predict which fund managers will beat the market seems attractive. The problem is the Wall Street bullies have convinced you that it can be done when in fact it cannot. The markets are random and unpredictable. You should invest accordingly, with the help of an investor coach.

Reach Skilled Volunteering
Reach Skilled Volunteering (Photo credit: Wikipedia)

Among funds whose trailing 3-year performance was in the lowest-ranking decile, “non-trustee” funds were almost three times as likely to be removed the following year (29.6%) as trustee funds (11.9%). Did the keeper funds reward their administrators’ faith by rebounding? Not in the short run: The researchers found that, on average, those trustee funds went on to underperform their benchmarks by 3.6% in the year after they survived the cut.What keeps slacker funds from getting expunged? As MarketWatch’s Ian Salisbury has reported, many trustee firms offer employers pre-packaged rosters of funds, an arrangement that can keep individual funds from getting closer scrutiny; the trustees also often cut employers a break on administrative costs if the employers let the trustees have more leeway in picking funds.

But there’s another factor in play: The bad funds don’t seem to bother employee-investors that much. Plan members, of course, could vote with their feet and leave these funds behind (ideally, in favor of index funds where underperformance would be less of an issue). But according to the NBER study, while 401(k) investors tend to chase good performance and pour money into hot funds, they’re less likely to pull their assets out of a poor performer—unless, of course, the trustees take it out of the plan. Evidently, inertia trumps disappointment.

Most employers do not realize that they are accountable for the funds in their 401(k) plan. These same employers, mistakenly believe the person selling them the plan are accountable for the funds in the plan. To find an adviser willing to accept responsibility for fund choices, you must have them agree, in writing to serve as the ERISA 3(38) investment manager.

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

Posted via email from Curated 401k Plan Content

Enhanced by Zemanta

Leave a Reply

Your email address will not be published.