Have you looked at your 401(k) lately? Do you know what investment options are available to you? If so, the next step is to understand these funds a little deeper. As you review the available investments, consider the following checklist:
- Are the funds active or passive? (More information on this subject here.)
- What are the expense ratios of the funds? (More information on average expense ratios here.)
- What asset class does each fund target? (More information on asset class allocations here.)
If you don’t want to select the funds yourself, consider a lifestyle-allocation fund. These funds are often labeled as conservative, moderate and aggressive. They tend to be more expensive, but are a good alternative if you don’t feel comfortable selecting your allocation to each individual fund choice. Also, the Empirical team would be happy to take a look at your plan options and recommend an allocation.
Some of the mutual funds available to you in a 401(k) are pretty lousy. Funds we consider to be “lousy” have high expense ratios and are actively managed. As this article points out, “lower fees, by definition, improve returns…” and research has demonstrated that the majority of active managers fail to beat index funds.
If your employer’s 401(k) plan only has actively managed funds, consider speaking with the department that manages your retirement plan. Show them the research on passive funds and how lower expense ratios translate to higher returns for participants. We would be happy to provide the empirical evidence to help you start the discussion.