This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Large 401(K) Funds in Growth Bind

Are 401(k) participants putting their money into the best funds? Probably not, says Mike Alfred, CEO of BrightScope, a data firm that tracks 401(k) plans.

After analyzing 50,000 retirement plans, Brightscope identified the 10 most popular funds chosen by participants.

The list includes giant funds, such as American Funds Growth Fund of America (AGTHX), which has $151 billion in assets, Fidelity Contrafund (FCNTX), $68 billion, and Dodge & Cox Stock (DODGX), $40 billion.

These funds gained wide followings because they delivered solid performance but Alfred says the success may not last. "When funds become big, it is difficult for them to continue outperforming," he said.

All too often, growing funds follow a disappointing pattern. In a typical scenario, a fledgling fund starts by delivering strong performance that attracts a big inflow of assets as investors discover the hot manager.

As the fund expands, the portfolio manager must work harder to employ the assets. Instead of just taking a limited number of attractive stocks, the manager may be forced to sop up cash by buying some less appealing shares.

With more assets in the fund, trading becomes more difficult and expensive. A manager who wants to buy $1 million worth of shares in McDonald's (MCD) may complete the trade in seconds.

By contrast, Fidelity Contrafund, which owns $1.6 billion worth of McDonald's, faces a monumental task. Buying billions of dollars worth of shares can take weeks or months. When the manager buys so much, the trading is likely to push up the share prices, making the transactions more expensive. All that drags down returns, as the nimble star fund turns into an unwieldy also-ran.

Alfred would like to see the employers who sponsor 401(k) plans begin to select more small funds. But he said that isn't likely to happen any time soon.

To pick funds, employers typically hire consultants who favor winning funds from big companies. The employers select a menu of funds, and participants tend to gravitate to those with the best track records.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
TSLA $240.76 0.00%
YHOO $36.60 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs