401(k) Advice—for a Hefty Fee

[Arnie]

Getting Going: What's 401(k) Advice Really Worth? - WSJ.com

Companies like Schwab, Fidelity, and Vanguard offering financial planner access and managed accounts with third parties like Financial Engines providing the advice. Seems to make the point by examples that most are uneducated enough to need such services and ends saying that 0.65% is in expenses is reasonable. I assume that is five to ten times what most people on this board are paying. I like the examples about how the Harvard staff members and Wharton MBA students chose a portfolio from among the four S&P 500 index funds:

Because the funds had the same investment strategy, the participants should have selected the one with the lowest expenses. Instead, many made their selections based on past performance—relying mostly on the return since inception, a number that varied only because the funds were started at different times. Others tried to "diversify" among the four funds, even though they all were essentially the same, except for fees. Even when provided with a cheat sheet of the annual fees and loads, only 10% of the staffers and about 20% of the MBA students selected the fund with the lowest expenses. Overall, the groups selected a portfolio with significantly higher fees than the cheapest fund, a move that would have sliced their lifetime returns.

 

[donheff]

Interesting Arnie. Many of those MBA students will be future financial advisers and fund managers. Some of the Harvard staff probably are already. Shows you what you are paying for.

 

[Animorph]

Since total return performance is net of fees, using past performance was not a bad strategy. However they should have used the same calendar period. That would show up tracking errors and expenses not included in the official ER (like trading). Multiple 1 year periods would show how consistent the tracking was. Still, that is a disappointing result. Guess they didn't put much effort into the selection.

 

[saluki9]

Arnie - I suggest you spend a couple years reviewing a couple thousand self directed 401(k) and Cash Balance pension accounts. Only then can you really obtain perspective on the horrible investment decisions that the majority of people make in choosing their asset allocation.*

65bps for people to get a well allocated portfolio that is rebalanced for them isn't bad at all. As far as expenses go for DB plans it is quite cheap.





* The standard asset allocation model used on the average account I've seen is to take 100% and divide it by the number of funds available in your plan. Then put an equal amount in each fund.

 

[Arnie]

Arnie - I suggest you spend a couple years reviewing a couple thousand self directed 401(k) and Cash Balance pension accounts. Only then can you really obtain perspective on the horrible investment decisions that the majority of people make in choosing their asset allocation.*

65bps for people to get a well allocated portfolio that is rebalanced for them isn't bad at all. As far as expenses go for DB plans it is quite cheap.

I've read about and come in personal contact with plenty of examples of bad investment decisions and have even made my own in the past. For the ones I've missed, I'll save two years and take your word for it.

I don't understand your references to DB plans, since this was about 401(k)'s.

 

[saluki9]

I don't understand your references to DB plans, since this was about 401(k)'s.

Meant to type DC, not DB. Sorry