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Low Cost Index Funds for 401(k)’s

Posted on | June 3, 2011 | No Comments

I’m generally pleased with my 401k, but I feel there is some room for improvement.  I do get company matching but it is only 3% which seems to be a defacto standard.  I think my employer could do at least a little bit more.  My main concerns are investment options and fees.  Ron Lieber wrote an article in the New York Times titled “Why 401(k)’s Should Offer Index Funds”  arguing for inclusion of low cost Index Funds in all 401ks.

I am currently contributing to a S&P 500 index and a small cap index fund.  Additionally, I have three additional mutual funds.  So it seems i’m paying to have a team of analysts to try to beat the indices.  The odds of them succeeding are stacked against them though.

For the 20-year period that ended in December, 72 percent of actively managed mutual funds that invest in United States stocks (including those that closed during that time period) did worse than their benchmark index. In United States bond funds, the figure was 81 percent. International stock mutual funds showed similar results over a 15-year period.

The writer also indicates that the fees charged by mutual funds compensate for the cost associated with operating the 401k .   I would expect that the 401k provider would still be able to make money anyway.

I also came across an article that indicated that The Charles Schwab is planning to offer low cost ETFs in a 401k.  They won’t be available until next year.  I’d definitely like to have the additional options to choose from.

One thing to keep in mind though is that Index funds and ETFs do well when the whole market is in sync going up or down.  During 2009/2010 it didn’t matter what stock you owned the whole market was in a recovery mode.  That would have been a great time to own the broad indices.  Now that the market has recovered it seems that more active management might have the advantage.  Again, though, I’d rather have the lower fees with the market average returns.

I think I’ll start lobbying to get our 401k changed over to Schwab.


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