401k Investing for Newbies and Nerds
There are 90 million American workers who have collectively own $14 trillion in their 401k accounts. They face both challenges and opportunities. The largest opportunity is that their accounts are investment accounts, not savings accounts, and for the past three decades, many have grown their balances in the low double digit range. Those with the highest return have constructed portfolios that focus on index funds and avoided target date funds.
The main challenge 401k owners face is that there are required to make their investment decisions by choosing from a limited menu of mutual funds. 42% of 401k participants have found that including index funds in their portfolio has provided them with results that optimize their investment experience.
The 90 million 401k account owners can be divided into 3 categories. The first are those who could care less about their money and are willing to just take what they are given. The second group, NEWBIES, are inexperienced in the investment process, but are willing to become engaged in the management of their hard-earned dollars. The third group, NERDS, are those who have a modicum of investment expertise and are willing to devote the time and energy to expand their investments skills.
My mission is to motivate 401k participants and their employer plan providers to become engaged in their account and then train them how to optimize their results.
I have a 62-years of stock market experience. I have been a stockbroker, finance professor and individual investor. I have no investment products to sell. All I have to offer are the objective observations of one who has been there and done that.
401k Investing for Newbies and Nerds
Season 2 Episode 12 Pulling Back the Curtain on Target Date Funds
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The Wizard of Oz is a story about a girl from Kansas, who gets sucked up in a tornado, connects with a bunch of odd ball characters and follows a yellow brick road looking for a benevolent wizard. When they get to the wizard’s palace, they pull back the curtain and find that the wizard is nothing more than a con man from Omaha, Nebraska.
40 million Americans own at least one target date fund in their 401K account. What began as a simple, low-cost investment vehicle has evolved into a complex and expensive one. In this episode, I will peel back the curtain on index funds and explain them in a manner that inexperienced investors can understand.
Target-date funds were created in the early 1990s. The goal was to provide investors with a simple, cost-efficient mutual fund that matches the changes in their risk profile as they age.
In their early format, TDFs were formulaic and passive. Formulaic and passive funds don’t generate big fees, so it didn’t take long before marketing departments of Wall Street started burning the midnight oil, and the underlying mutual funds in TDFs began to change from passive, inexpensive index funds to more expensive, actively managed funds.
An article in the Wall Street Journal document the most recent change in the TDF saga. Over the past decade, the pressure to cut fees has intensified and employers that sponsor 401k plans have drifted away from some mutual funds. Instead, they have been selecting Collective Investment Trusts. CITs are pools of assets offered by banks, and trust companies that are only available to retirement plans such as 401ks.
Does this mean that 401k participants should avoid Target Date Funds at all cost? No. When properly applied, TDFs have the potential to be the best fund solution for a portion of the 401k population. My goal is to alert 401k participants and their plan providers of the need to do a complete and through due diligence before finalizing their investment decisions.