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Why do 401k plans have so few fund choices?
Old 01-04-2012, 07:09 PM   #1
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Why do 401k plans have so few fund choices?

I don't understand this. My company's plan offers 40 or so choices out of the thousands of funds available. Why should I be limited to these few? What is the reasoning behind it? If it helps, my 401k is through theonline401k.com.
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Old 01-04-2012, 07:45 PM   #2
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I don't understand this. My company's plan offers 40 or so choices out of the thousands of funds available. Why should I be limited to these few? What is the reasoning behind it? If it helps, my 401k is through theonline401k.com.
Actually, 40 is a huge quantity of funds. There is likely a lot of overlap within the holdings and strategies of the funds in the group. Most people get overwhelmed by having so many choices. Your employer is likely trying to offer a lot of choice, or......

Some employers try to reduce thier cost of providing the plan, so they let the fund companies push funds with high expense ratios that are paid by the participant.

We have about that many funds in our plan too, but most are popular low cost funds (Fidelity and a few others). The least popular funds get weaned from the list.
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Old 01-04-2012, 09:09 PM   #3
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Actually, 40 is a huge quantity of funds. There is likely a lot of overlap within the holdings and strategies of the funds in the group. Most people get overwhelmed by having so many choices. Your employer is likely trying to offer a lot of choice, or......

Some employers try to reduce thier cost of providing the plan, so they let the fund companies push funds with high expense ratios that are paid by the participant.

We have about that many funds in our plan too, but most are popular low cost funds (Fidelity and a few others). The least popular funds get weaned from the list.
+1
30-40 is pretty common. We have 154 and it drives everyone crazy. Most employees don't know where to begin and there's way to much overlap. Ideally, a plan would offer 1 "best" fund for each major investment category (large cap growth, lg value, small growth and value, foreign, etc). I think I read a study showing that too many choices results in investment paralysis for the average 401k investor... either not investing or staying in cash.
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Old 01-04-2012, 09:16 PM   #4
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I guess I never thought about that. For me, I want to be able to choose from everything available. Clearly, that won't be happening. Of course I could minimize my 401k contributions and invest in a separate IRA, but then I would forgo the benefit of contributing my pretax income. I just hate being forced to pick from a preset selection when it is determining my financial future.
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Old 01-04-2012, 11:20 PM   #5
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I guess I never thought about that. For me, I want to be able to choose from everything available. Clearly, that won't be happening. Of course I could minimize my 401k contributions and invest in a separate IRA, but then I would forgo the benefit of contributing my pretax income. I just hate being forced to pick from a preset selection when it is determining my financial future.
Review your Summary Plan Description to see if your plan allows you to do a rollover from the 401k to an IRA. If it does, you can then invest the IRA any way you choose. This is what I do to get access to individual stocks. Not all plans permit an IRA rollover.
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Old 01-05-2012, 06:13 AM   #6
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Review your Summary Plan Description to see if your plan allows you to do a rollover from the 401k to an IRA. If it does, you can then invest the IRA any way you choose. This is what I do to get access to individual stocks. Not all plans permit an IRA rollover.
Good question. I reviewed my Summary Plan Description just now and I don't see any wording that clarifies either way. I sent in a question to the help desk to find out more info. Thanks!
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Old 01-05-2012, 06:31 AM   #7
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Of course I could minimize my 401k contributions and invest in a separate IRA, but then I would forgo the benefit of contributing my pretax income.
Why not just contribute up to the company match on the 401(k), add to a TIRA (deductable) up to your limit, and then switch back to the 401(k) to max out your annual max (assuming you have the money to do so)?

I'm sure you can compute your own contributions so you can make monthly contributions to both forms of pre-tax investing, if that is your goal, to even out contributions and not miss any company match.
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Old 01-05-2012, 09:01 AM   #8
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My first 401k had, I think, 10 funds. I just put 10% of my contributions in each of them. I am certain I was not the only one employing this strategy.
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Old 01-05-2012, 09:17 AM   #9
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There is a lot of research that shows why too many options are counterproductive. One exmple here How Many Investment Options Should 401k Plan Sponsors Offer?
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But fees aren’t the only reason why 401k plan sponsors might inadvertently hurt 401k plan investors by offering too many investment options. A decade ago, in a study conducted by Shlomo Benartzi and Richard Thaler (“Naive Diversification Strategies in Defined Contribution Saving Plans,” American Economic Review, March 2001, Vol. 91.1, pp. 79-98.), suggested 401k investors tend to use simple decision making heuristics when picking 401k investment options. These unsophisticated approaches often lead employees to merely split their dollars equally among all investment options.

While Benartzi and Thaler focused on the asset allocation implications of this, a far more meaningful impact was the over-diversification caused by assembling a portfolio of too many mutual funds. In effect, these naïve investors, in seeking greater diversification, may have actually created a de facto index fund, even when the underlying investments were all actively managed funds. The problem arises when one looks at the aggregate expense ratio of all these actively managed funds. This expense ratio tends to be much higher than a comparable index fund and, since the de facto index fund will likely yield a return similar to that comparable index fund, this expense ratio difference can only hurt the 401k investor. This is not an “active vs. passive” argument; it is an argument between high-cost and low-cost index funds.
This must be a catch-22 for a business, because a plan with few choices will dissatisfy employees that like to actively manage their investments, and many options confuses others.
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Old 01-05-2012, 09:34 AM   #10
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I guess I never thought about that. For me, I want to be able to choose from everything available. Clearly, that won't be happening. Of course I could minimize my 401k contributions and invest in a separate IRA, but then I would forgo the benefit of contributing my pretax income. I just hate being forced to pick from a preset selection when it is determining my financial future.
I guess it's a matter of perspective as for me 40+ funds would be too much to choose from and would lead to "paralysis by analysis".

http://en.wikipedia.org/wiki/Analysis_paralysis

If I had to go through the exercise of examining the performance of each fund available before choosing, I might conclude the exercise isn't worth my time and effort (That's one of the reasons why I'd just choose to index).

Once again, a matter of perspective.
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Old 01-05-2012, 10:11 AM   #11
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30-40? All of my plans so far have offered less than 10 fund choices.
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Old 01-05-2012, 10:20 AM   #12
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30-40? All of my plans so far have offered less than 10 fund choices.
And you're okay with this?
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Old 01-05-2012, 10:26 AM   #13
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Lots of great responses.... here is my summary...

Most plans do not have that many funds... 10 or so is very common... (this has changed a bit since they came out with the retirement dated funds, such as 2020, 2025, 2030 etc.)

Most participants are not that knowledgeable in investing their money and giving them to many options is bad.

There are legal reporting requirements that make it impractical to offer the whole universe. And there are more to come.

Not all providers offer funds from every other fund company. IOW, if you go with Fidelity, they do not offer Vanguard funds in their lineup. (they do offer other fund companies, but I think that is because there is an agreement that they offer Fidelity in theirs... just my thinking)..


I set up the plan for our company. We had 600+ funds to choose from... I picked a bit over 60 and to me that was a LOT... as someone mentioned, I chose the best available from the various categories... we then had to take all the retirement funds and I thew in a few commodity funds for good measure..


Also, invest your outside money in the funds that are not in the plan and you should not have to worry about it. IOW, there should be some funds in there you can invest in and your other money fills the holes that are not in the plan....
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Old 01-05-2012, 11:34 AM   #14
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And you're okay with this?
Well, even if I wasn't, my only course of action would be to find another job with a different plan.

And actually, until I educated myself about investing a handful of funds was just right; more would have scared me into inaction. After I educated myself I might have liked more choices to fine tune my AA, but the major asset classes in passive and active management were represented well enough I was able to arrange my overall AA to my satisfaction.

At the end of each job I've rolled my 401(k) into an IRA, so now I have any fund I want, but I think I'm currently using four, including a MM "cash" fund and my 401(k)'s lowest-expense fund.

The LifeStrategy, Target Retirement and similar managed-target funds are relatively new. I don't recall what options I have in my current 401(k) except that all but one (Spartan 500) have expense ratios too high for my tastes, so I put all new contributions into Spartan 500 and adjust overall AA—if needed—by tweaking my IRA AA.

When job hunting I don't think I have known the investment funds available before hire, although I did know who managed the plan (almost always Vanguard or Fidelity) and what the match and vesting period is. (Speaking of which, I just vested....)
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Old 01-06-2012, 01:39 PM   #15
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They are also plans which I considered best of both worlds.
Few funds + full brokerage option. Check if your provider offers one.
Schwab calls it Personal Choice Retirement Account, I don't remember what's Fidelity name for this feature inside 401k.
It basically allows you to treat use your 401k as a brokerage account having access to all stocks & mutual funds available. I use it to buy ETFs inside my 401k.
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Old 01-06-2012, 02:29 PM   #16
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Lots of great responses.... here is my summary...

Most plans do not have that many funds... 10 or so is very common... (this has changed a bit since they came out with the retirement dated funds, such as 2020, 2025, 2030 etc.)

Most participants are not that knowledgeable in investing their money and giving them to many options is bad.

There are legal reporting requirements that make it impractical to offer the whole universe. And there are more to come.

Not all providers offer funds from every other fund company. IOW, if you go with Fidelity, they do not offer Vanguard funds in their lineup. (they do offer other fund companies, but I think that is because there is an agreement that they offer Fidelity in theirs... just my thinking)..


I set up the plan for our company. We had 600+ funds to choose from... I picked a bit over 60 and to me that was a LOT... as someone mentioned, I chose the best available from the various categories... we then had to take all the retirement funds and I thew in a few commodity funds for good measure..


Also, invest your outside money in the funds that are not in the plan and you should not have to worry about it. IOW, there should be some funds in there you can invest in and your other money fills the holes that are not in the plan....
I'd like to add two points to this thread.

First, in response to above, there are two basic 401k platforms

Open architecture (meaning different fund families can have there investments mixed like Van Kampmen funds in a Fidelity 401k).

The other platform is a closed one, where only funds from one family are offered within the 401k. If the platform is closed, the participants will be limited to what that one fund company has to offer.

Second, the people choosing the funds within a 401k (defined contribution plan) have a fiduciary responsibility to the plan. If you want a better 401k, throw the fiduciary word around, there are legal implications for the company if they are not offering good choices. Good is loosely defined. I believe if there are 3 different risk-reward characteristics inside the 401k the standard is met (stocks-bonds-cash in 3 different funds would meet this requirement).

If you are telling your company what funds to include in the 401k, be aware you might have that fidicuiary role on yourself- if one of those fund selections has a bad period, you should consider the implications to yourself.
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Old 01-06-2012, 04:55 PM   #17
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I think the best 401K plan out there is TSP and it offers only 5 choices plus a variety of lifecycle funds. To me the ideal 401K would offer those choices plus the option to self direct your 401K in a brokerage.

I am pretty sure that anything much over 10 ends up being to much for the average person to deal with.
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Old 01-06-2012, 05:17 PM   #18
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And you're okay with this?
I only use one of the funds in my plan for 100% of my contributions.

Most people aren't smart enough or educated enough to choose from a menu of more than maybe 8 or 10 funds anyway.
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Old 01-06-2012, 05:28 PM   #19
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I was once the administrative manager of a local engineering firm and the CEO selected 2% of each of the 50 available funds. I asked what his strategy was in making that selection. He said "diversification." I believe that he was a better engineer than he was an asset manager.
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Old 01-06-2012, 06:04 PM   #20
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There is a lot of research that shows why too many options are counterproductive. One exmple here How Many Investment Options Should 401k Plan Sponsors Offer?


This must be a catch-22 for a business, because a plan with few choices will dissatisfy employees that like to actively manage their investments, and many options confuses others.
Interesting article...
I think there's only a catch-22 if the choices are too limited or the funds are mediocre. For some reason, many plans have subpar choices and missing categories. It seems to me you could get a lot done with under 30 choices: a few target funds, 10-12 domestic in differents caps, a few foreign, 4-5 fixed, a REIT, and a commodity.
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