Your Job Description Does Not Include Portfolio Manager

Posted On: December 12 2015

Meet Kevin, our director of marketing. In the evenings he’s a private portfolio manager. And here’s James, our shop foreman. He’s also a private portfolio manager in his spare time.

When you think about it, you could be saying the same thing about your employees if you have a self-directed 401(k) plan as your company’s retirement plan. Why? Because each plan participant, regardless of their knowledge of markets or their investment experience, is required to manage the investments in what is likely to be the most important resource for the last 25 to 30 years of their life. Their investment performance will determine their quality of life during retirement.

But your plan offers a wide range of professionally managed mutual funds, right? You’ve only selected those funds with a solid performance record for the last 3, 5, or 10 years. If there is one thing you know for certain about your company’s 401(K) plan it is that your employees can allocate their retirement savings in funds directed by some of the best money managers in the world.

That’s true in theory, but investment returns only count in practice. Consider the following:

  1. Mutual funds tend to focus on sectors of the market or investment styles that go in and out of favor. Large cap, small cap, growth, value, emerging markets, technology, and gold funds are but a few of the 100’s of funds in the market today. While each of these is professionally managed, and many of those managers are among the top in the industry, sectors and styles that are strong this year may be weak the next. Top-flight managers retire or are lured to other companies. In effect, your employees have serial professional management, not professional management. They are still responsible for adjusting their investments to adjust to changes in the market.
  2. Mutual fund performance data is based on the calendar year broken down into quarterly segments. But that’s not how plan participants invest. Most invest small portions of each paycheck while their company’s matching funds come as a single contribution in the first quarter of the next year. Their rate of return can vary widely from the posted returns for the fund. A recent article in the Wall Street Journal estimated the returns of actual investors to be less than half of the stated returns for a given mutual fund.
  3. According to the Investment Company Institute, in 2011 10.5% of plan participants changed the investment allocation of their account balances, and only 7.1% changed the asset allocation on new contributions. The fact is that the vast majority of 401(K) plan participants are one-decision investment managers: they never change their investment allocation, regardless of changes in market conditions. That’s not the mark of a professional investor.

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