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William Bernstein is one of the most respected financial minds of our time. His book,
The Intelligent Asset Allocator, should be read by every investor. In an insightful commentary titled "What the Investment Industry Doesn't Want You to Know," Bernstein observes that investors "can only positively impact one aspect of investment performance -- your allocation of assets among broad asset classes." Stock picking, mutual fund picking and market timing are "irrelevant."
Keep this advice in mind, since it is the primary reason why your 401(k) is probably a "clunker." Here's a checklist of others:
1. High costs: Low costs correlate directly to higher returns. The total cost of your plan should not exceed 1.50%. By "total cost," I mean the expense ratio of mutual funds in the plan, record keeping, custody, administration fees and advisory fees.
2. No investment advice: Advisers to 401(k) plans are well compensated, yet most limit communications with plan participants to "education." Your adviser should give investment advice. Most advisers won't because of the potential liability. If the investment options in the plan were in the best interests of plan participants, they wouldn't have this concern.
3. Revenue-sharing and hidden mark-ups: Brokers and insurance companies typically extract payments from mutual funds that want to be included as investment options. How objective can their advice be if they are receiving these payments? They also mark up management fees charged by mutual funds. I reviewed a plan that included a
Vanguard Target Retirement Fund, which
Morningstar reported had an expense ratio of 0.18%. The plan was charged 0.93% for this fund. This difference comes out of your returns.
4. The plan adviser is not a "real" fiduciary: Brokers and insurance companies misuse the term "fiduciary" in describing their obligation to the plan and plan participants. The only real fiduciary is a 3(38) ERISA fiduciary. This kind of fiduciary accepts 100% of the liability for the selection and monitoring of investment options in the plan. I have never seen a 401(k) plan where a broker or insurance company agreed in writing to be a 3(38) ERISA fiduciary. Any other designation of "fiduciary" is meaningless.