FundAdvice.com - 401kHelp.com

...to discover that a very high percentage of plans significantly shortchange participants by limiting investment choices to the wrong kinds of mutual funds.

Over the last fifty years, innovations in financial markets research have led Nobel Prize-winning economists and academics to analyze the sources of investment risk and return, and their conclusions have reshaped portfolio theory and greatly improved understanding of the factors that drive performance.

Their research shows that over time:

-- small cap stocks outperform large cap stocks
-- value stocks outperform growth stocks
-- international stocks outperform domestic stocks
-- fund managers underperform index benchmarks

In fact, the motivation for the launch of index funds in the early 1970s was the poor performance of “active” fund management, that is, the attempt to improve returns through stock selection and market timing.

The academics have shown that the chief determinate of portfolio returns is not stock selection, but asset allocation, and that a broadly diversified portfolio of passively managed, non-correlated asset class index funds is likely to achieve higher returns with less volatility and risk. Moreover, passively managed index funds further contribute to higher returns because they have lower expenses and are more tax efficient than actively managed funds.

Yet we’ve found that far too many employers have retirement plans that offer too few fund choices, too many or all of which are actively managed. Incredibly, some plans even include funds that charge a sales load or that build in other sales expenses.

Even though today’s 401(k) plans use the internet and other recent advancements to offer more features and services than ever before, participants are still woefully unprepared to make informed investment decisions. According to a recent study, 36% of participants in self-directed plans invest in only one fund, 19% in only two funds, and 80% have never rebalanced their account.

Some 64% feel their company provides average to poor education about their retirement plan. And 93% of 401(k) plan participants believe that “unbiased investment advice is important or very important,” yet only 6% feel their employer is doing an excellent job of providing this.

Understandably, employers may be reluctant to provide investment information because of a perceived liability risk. But what are the implications of a retirement plan composed of high-cost, actively managed funds weighed against a plan that facilitates an asset allocation endowed by the greatest financial minds of our time?

To reject their prescription is to take greater risks at the expense of lower returns.

For a sample form letter to ask your retirement plan administrator to consider adding index funds to your investment options, click here .