Your 401(k) May Soon Have Fewer Investment Choices — But That's a Good Thing
Your company's retirement plan may soon shrink its investment menu. While few of us like the idea of having fewer choices in life, the move could actually turn out to benefit most investors.
For millions of Americans, their employer's 401(k) is their main retirement savings vehicle. But experts have long complained that plans, which typically offer several dozen investment choices, can intimidate and ultimately turn off workers with their complexity and cost.
The good news is plans have been getting simpler and cheaper. Most plans now automatically enroll workers in funds that offer an age-appropriate mix of stocks and bonds. New evidence suggests that firms are streamlining their à la carte investment menus, too.
Financial firms that help employers design 401(k) plans say they are choosing fewer investment managers to include in 401(k) fund rosters than in the past, according to results of annual study of 180 such advisers by Sway Research LLC.
The survey, first reported by trade publication Investment News, targeted consultants who typically work with mid-sized 401(k)s with $10 to $50 million in assets. Roughly half of these advisors "agreed" or "strongly agreed" they were working with fewer investment managers. Only 15% about of the advisors disagreed.
Less is More
So why do investors benefit from fewer options?
Because, the trend is largely driven by 401(k) plans emphasizing passive index mutual funds rather than actively managed ones that aim to pick winning stocks, according to Sway Principal Christopher Brown.
Since index funds are designed to represent broad swaths of the market, like all U.S. stocks or all developed world foreign stocks, investors don't need as many options.
What's more, the best index funds tend to be the cheapest ones, and those cheapest funds tend to be offered by a few very large investment firms, such as Vanguard, State Street and Dimensional Fund Advisers, who can rely on their giant scale to gain a pricing edge, according to Brown.
While savers might like the idea of a large menu of mutual funds in the abstract, when it comes down to it, most are better sticking with index funds and pocketing the extra cash that their low fees have bought us.