(Changes average number of funds in 401(k) plans in 9th graf to
22 from 20.)
By John Wasik
CHICAGO, Sept 5 Let's say, after recent fee
disclosures from retirement funds, that you have discovered that
your 401(k) is a rusting beater of a plan. It's expensive to
maintain, non-diversified and has performed poorly over the last
You may have to do some internal lobbying to change your
plan. Yet if you can enlist the support of fellow employees,
managers and executives by explaining how poor returns eat into
their retirement lifestyles, you might gain some traction.
Changes are possible, even when employers are reluctant to do
Consider the idea of placing company stock in 401(k) plans,
an idea that became toxic after the Enron-WorldCom debacles. The
percentage of companies engaging in this practice has dropped to
under 10 percent, down from 11 percent in 2009, according to
BrightScope, a San Diego-based service that tracks retirement
Once you convince your employer to shop for another plan,
you need some decent, "best-in-show" plans to emulate. In
keeping with my "benchmark and balance" strategy, (link here)
these may be funds that are relatively low cost and that track
most of the important asset classes: U.S. stocks/bonds,
international stocks/bonds, real estate investment trusts
(REITs), commodities and inflation-protected securities (TIPS).
A reasonable model would be the University of Pennsylvania's
Basic Plan. Featuring Vanguard funds, its offerings cover five
major asset classes and more than 40 minor ones, according to
John Zhong of MyPlanIQ, a service that lists and rates 401(k)
and other portfolios. "Many university deferred or 403(b) plans
have low-cost Vanguard funds," Zhong said. "They are usually
pretty complete." (Disclosure: most of my 401(k) is in Vanguard
What's inside Penn's plan that I like? You can cherry-pick a
number of funds such as the Balanced Index (VBINX) for a
moderate risk level or invest in emerging market stocks (VEIEX)
or REITs (VGSIX).
The Penn plan is notable for its flexibility. If you don't
want to choose individual funds, you can go with the all-in-one
target date funds, which shift allocations to lower stock-market
risk as you get older.
Although I'd prefer to see even lower-cost, exchange-traded
funds, many of the Vanguard funds employ the passive index
approach to sample asset classes. If you choose to adopt a
"strategic moderate" allocation and rebalance on a regular
basis, you would see a five percent year-to-date return through
August 31, according to MyPlanIQ.
From an employer's perspective, offering a large number of
funds is desirable - no one can say you didn't provide ample
diversification opportunities - but sometimes the sheer number
of funds is daunting. The average plan offers 22 funds,
according to Aon Hewitt, a benefits consulting firm. When faced
with too many choices, a lot of us become paralyzed with
indecision and make bad choices.
The Google 401(k) is another "best-in-show" plan. You can
broadly diversify with the Total International Stock Index
(VGTSX) or invest in a conservative income fund like the
Vanguard Wellesley Income fund (VWINX). A strategic, rebalanced
portfolio reaped an 8.7 percent return this year through August
31. (Note: As with all of the plans I cite, I haven't mentioned
all of the funds within them and many may have changed their
For an even more streamlined - and lower-cost - approach, I
like the simplicity of the Sharebuilder 401(k), which uses all
exchange-traded funds (ETFs). The plan offers funds covering
commodities, TIPS, stocks, bonds and REITs. There are even
emerging markets bonds through the PowerShares Emerging Markets
Sovereign Debt fund (PCY). The portfolio's three-year strategic
return has been just under 10 percent.
What is essential for any high-quality 401(k) is something
that's often missing from the mix: Personalized advice. You can
find this if you have spent any time on a major mutual fund
website, where you can find allocation tools that will help you
decide which funds to choose and the right percentage of each.
Play around with them a bit, inserting your age, risk tolerance
(aggressive, moderate, or conservative) and goals (income,
Keep in mind that you'll need some basic education before
you even make a decision on how to allocate. Have you considered
emerging-markets stocks for global growth? Do you have
inflation-protected bonds if most of your portfolio is
income-oriented? Have you considered commodities and REITs,
which may not move in lockstep with stocks?
It is helpful to know the reason for owning each fund and
how it fits into your overall plan. Write down an investment
policy statement that includes your objectives and percentage
allocation to each asset class. For a moderate investor, a
worthwhile mix would be 60 percent stocks, diversified across
U.S. and emerging/developed markets with the remainder in U.S.
bonds, emerging markets, commodities, REITs and TIPS.
What if your plan already looks like one of the models I've
suggested? Then you can fine tune it by seeing where the gaps
are. When I overhauled my retirement portfolio recently, I
discovered that a commodity fund I held did worse than most of
my stock funds in 2008. That wasn't supposed to happen, so I got
rid of it and found an inflation-protected securities fund
instead - the Vanguard TIPS fund (VIPSX). I plan to add a
diversified commodities fund later this month.
When you come up with an allocation, you can do something
that the industry calls a back-test. How did it perform over the
last five years, which includes 2008? Most fund websites will
also provide some tools that will tell you how certain
allocations have performed. Yet, they are ballpark averages. You
will need to look at individual fund returns to get a better
To do this right, your model portfolios should serve as a
guide, but you may need to change your mind set. Assembling a
good mix doesn't mean picking all of the best-performing funds
of the last year or so. That will lead you astray, since hot
performers rarely repeat.
Focus on getting the best returns across all asset classes
through index funds with the least amount of total risk.
Professional advisers spend a lot of time and energy trying to
do this, and they often don't get it right, so don't feel
discouraged. Find some durable models and see if they work for
you. They may not look elegant, but they should serve you well
over the long run.
(Editing by Heather Struck, Lauren Young and Leslie Gevirtz)