Q: Without warning, our company announced a blackout period for our 401(k) funds. Our funds will be shifted from such Fidelity funds as...
Without warning, our company announced a blackout period for our 401(k) funds.
Our funds will be shifted from such Fidelity funds as Puritan, Spartan U.S. Equity Index, Magellan, Value, Mid-Cap, Small Cap and Freedom to Met Premier Pooled GIC, Oakmark Equity & Income II, MetLife Stock Index, Davis NY Venture, JP Morgan Mid Cap Value, Alger Mid Cap Growth, Lord Abbett Small Cap Value, Pioneer Oakridge Small Cap and American Funds EuroPacific.
MetLife has replaced Fidelity as the plan administrator. I’ve been told that we employees have no say in this switch.
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Ignoring asset-class diversification, what do these funds look like?
What are their expense ratios? How have they performed? What is your take on this?
This change indicates that your employer is still buying into the fund-management game that continues to reward investment-management companies at the expense of their investors.
Your original plan is pretty close to the standard Fidelity template for its 401(k) plans — an offering of Magellan fund, a number of other Fidelity funds, some funds from other fund firms, and its Freedom funds, which are “fund of funds” within the Fidelity group.
Fidelity funds have lower expense ratios than average. They also tend to have superior performance. In addition, they have the brand recognition that many employers value more than performance.
Unfortunately, Fidelity continues to offer the Magellan fund even though few investment consultants would put Magellan on their fund choice list.
According to Morningstar, Magellan has trailed its target index, the Standard and Poor’s 500, in the three months ending March 31, the last 12 months, the last three years, the last five years, the last 10 years, and the last 15 years. In every time period out to five years the fund has been in the bottom 25 percent of its peer group. At 10 years, it was in the bottom 50 percent of its peer group.
The other funds include Puritan, a four-star fund with a great long-term record, and several other four-star funds with good records and relatively low expenses. None of the Fidelity funds, for instance, has an expense ratio over 1 percent.
Your employer may have tired of waiting for Fidelity to do the right thing and take Magellan out of its lineup.
The MetLife offerings have consistently higher ratings from Morningstar and consistently higher expense ratios. Most have expense ratios well over 1 percent a year. You’ll have to check with your plan to learn which class of shares the plan will actually have because that determines the expense ratio. Depending on which funds employees choose, the new plan will have nearly double the costs of the Fidelity plan.
Whether that expense is worthwhile will depend on future performance.
Within the conventional wisdom, your employer has traded low expense funds for higher expense funds with better track records. This gives comfort to your employer, while it assures both the consultants and the investment managers of continued income from your investments.
It may also work to reduce your long-term return and your retirement nest egg.
It’s a shame corporate managements can’t be as diligent about cost reduction in 401(k) plans as they are about cost reduction elsewhere.
Joe Louis once said, “I don’t like money actually, but it quiets my nerves.” Have our nerves been quieted at all since the Bush administration took over in 2001 as shown by the Dow, Nasdaq and S&P averages?
This is a loaded question. It assumes there is a one-to-one relationship between politicians in office and the stock market. There is some relationship, but it is far less than one-to-one. A better measure of “nerves” may be found in the consumer balance sheet, the collective mixture of assets and liabilities that measures our broad financial condition.
Those figures, which are available in the quarterly Federal Reserve Flow of Funds report, show that the value of our financial assets has risen strongly since the bursting of the Internet bubble, that our real-estate holdings have soared, and that our collective net worth was at a new record level at the end of 2004.
If money calms “nerves,” we ought to be dangerously tranquil.
Other concerns, however, trump money. Since Sept. 11, 2001, we have been living with a heightened sense of vulnerability.
It colors what we experience and adds a large measure of uncertainty to everything we do, including our investments.
Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at firstname.lastname@example.org. Questions of general interest will be answered in future columns.