Killing Sacred Cows In The 401(k) Industry

The recent economic downturn has exposed a lot of false assumptions for businesses. We are all rethinking our office space needs, employee needs and technology needs. 

Another belief you should challenge is the idea that your broker adds value by picking mutual funds for the company retirement plan. 

Killing Sacred Cows

In the early days of my career, I spent a lot of time choosing and removing investments from my clients’ 401(k) menus. With the benefit of hindsight, I picked mutual funds with outstanding past performance. If that performance ever lagged, I would put those funds on a watch list and eventually remove them from the menu. But after taking an unflinching look at the data, I came to the realization that all of that hard work led to no outperformance for the client. It was a hard truth I had to face to become a better advisor.

Ask The Hard Questions

Look at your 401(k) investments in this economic downturn. How did they perform?

Next, look beyond just the current mutual funds on your plan menu and instead look at your broker’s record of adding and removing those funds. Were the recommendations predictive? Or were funds removed from your 401(k) plan after a period of underperformance? Did the guidance to remove that fund come too late? Likewise, does adding a new, well-performing mutual fund after the fact help you?

These are the tough questions we should all be asking if we’ve hired a broker to pick actively managed mutual funds for the company 401(k) plan. The truth is that most fund recommendations are based on past performance which is not predictive of superior future returns.

A Better Value

Good advisors know that it’s hard to predict which mutual funds will do well in the future. That’s why we recommend passive index (not actively managed) funds as the core of our 401(k) menus. These low-cost investments ensure that you own a representative sample of the entire market. And Index funds generally outperform actively managed funds over time.              

The recent economic downturn has exposed false assumptions in our businesses. Ask the hard questions and be willing to kill scared cows.