Improving your plan
We have found that most 401(k) plans short-change participants in several ways. The most important shortcoming is that most plans fail to provide access to the investment choices that are likely to provide the best long-term results in terms of risks and rewards. 
 
That’s the bad news. The good news is that you can do something about it. You can lobby for change. Start by educating yourself with the resources on this site. Then share what you have learned with the trustees of your plan and ask them to give you access to the asset classes you need to make your money work as hard for you as it can.

On this page you will find a sample letter you can send to the trustees of your plan.


Suggested letter to trustees


   
 

Suggested letter to trustees
 

Here's a sample letter you can send to your retirement plan administrator to request that index funds be added to your investment options.

You will need to determine to whom it should be addressed. In every plan, some individual or group has authority to add investment options. Somebody in your employer's human resources department should be able to tell you who that is and who should receive such a letter.
 

 




Dear ___(plan administrator or trustee):      


 

As a participant in our company’s retirement plan, I have been studying what it takes to be a successful long-term investor. As you know, many of my fellow employees and I are depending heavily on this plan to ensure our financial futures. After reviewing the investment options available in our plan I have reluctantly concluded that the plan fails to give us some of the tools we need to do the best job of investing our savings effectively over the long term.

Because so many people, perhaps including you personally, are counting on our plan, I hope you will give this topic a few minutes of your time. I believe our plan could be significantly improved with the addition of a small number of new investment options. While I am not an expert in plan administration, I believe the costs and risks of doing so should be quite reasonable.
 

I have enclosed a few articles that I hope you will read and consider. Here’s a summary of what my research has shown:

Nobel prize-winning experts have concluded that the overwhelming majority (over 90 percent) of long-term investment results are determined by the asset classes represented in a portfolio. Therefore, having the right types of assets is critical. The research indicates that over time:

  • Small-company stocks outperform large-company stocks. According to Dimensional Fund Advisors, a large investment and research firm in Santa Monica, California, from 1927 through 2004, U.S. small-cap stocks had annualized growth of 12.4 percent. That compares with 10.4 percent over the same period for the Standard & Poor's 500 Index.
     
  • Value stocks outperform growth stocks. DFA figures indicate that from 1927 through 2004, U.S. large-cap value stocks grew at an annualized rate of 11.4 percent, compared with only 9.5 percent for large-cap growth stocks.
     
  • International stocks often outperform U.S. stocks, and because U.S. and international markets typically move up and down at different times, combining them can stabilize a portfolio. Here are some interesting comparisons of annualized returns for the period from 1970 through 2004: U.S. large-cap stocks, 11.2 percent vs. international large-cap stocks, 10.4 percent; U.S. small-cap stocks, 13 percent vs. international small-cap stocks, 16.5 percent.
     
  • When these four asset classes are combined and rebalanced each year, the resulting “smart diversification” (described in one of the enclosed articles) gives the portfolio higher returns. Using the four asset classes from the last example, it is easy to calculate that their average annualized return was 12.8 percent. When they were combined with annual rebalancing, the resulting annualized return was 13.4 percent.
     
  • Even more important, especially to conservative investors, is risk reduction. Measured by standard deviation, the average risk of these four individual asset classes from 1970 through 2004 was 20.8 percent. When they were combined, they produced a standard deviation of only 16.9 percent. That 16.9 percent is lower than the figure for any of the four individually.

It is easily possible to divide the universe of U.S. stock funds into large-cap stocks, large-cap value stocks, small-cap stocks and small-cap value stocks. You can do the same with international stock funds and wind up with terrific diversification via eight mutual funds. I also believe that an emerging markets fund would give us exposure to the long-term growth potential in developing nations such as China. Using an asset class that is not highly correlated with stocks, such as a Real Estate Income Fund (REIT), also makes sense. 

On the fixed income side of the portfolio I believe that using short-term, intermediate-term, and inflation protected bonds provides the capital preservation that retirement plans require.  I believe every one of these asset classes should be available to us in our plan. Most of them can be accessed with low-cost index funds, and I think our plan should have them.

Merriman, an independent investment firm and registered investment adviser in Seattle, has a free educational Web site, FundAdvice.com, where it has posted several Model Portfolios. Merriman also suggests these as good funds to include in 401(k) and similar retirement plans.

One example of these Model Portfolios would be at Vanguard using the following funds:

Vanguard 500 Index Fund, Vanguard Value Index, Vanguard Small Cap Index, Vanguard Small Cap Value Index, Vanguard REIT Index, Vanguard Developed Markets Index, Vanguard International Value, Vanguard FTSE All-World ex-US Small Cap Index, Vanguard Emerging Market Index, Vanguard Short-Term Treasuries, Vanguard Intermediate-Term US Treasuries, and Vanguard Inflation-Protected Securities. 

I hope you will seriously consider my request for the addition of one of these Model Portfolios. I am not proposing that any of the present options in our plan be dropped, and certainly every participant is free to make his or her own selections. By making these funds available in our plan, you will give serious investors more effective tools to make our money work harder for us. Is this too much to ask?

I appreciate your time and look forward to your response.



 


Articles to enclose with this letter:

The Ultimate Buy-and-Hold Strategy

The Perfect Portfolio
 

 

 

DISCLAIMER:
This information is provided by Merriman, Inc., a registered investment advisor, and is believed to be from reliable sources, but no guarantee is made as to accuracy or completeness. The investment securities and strategies discussed are not suitable for all investors. Recommendations are of a general nature, not based on knowledge of any individual's specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services. Unless otherwise noted, all reported or projected results (1) assume reinvestment of interest and dividends; (2) are net of any applicable management fees and transaction costs; and (3) do not reflect any effect of taxes. Past returns, whether actual or hypothetical, are not indicative of future results, which will be different from those of the past.