The Myth of the Active Advisor

I just read an interesting little article called Yesterday’sTop Mutual Funds in Today’s 401k Lineup.  I like the theme and one key point in particular caught my attention:  “Actually, no actively managed fund stays on top forever”.

In fact, virtually no actively managed funds outperform their index with any regularity whatsoever!   Decades of data and numerous empirical studies show that index funds, at approximately 1/5 the cost, outperform actively managed funds about 80% of the time. Not only that. Recent studies show that, more often than not, when active advisors recommend changes in funds, plan costs increase and the new fund does worse than the one it replaced! How could that be? Think about it. No one replaces a fund that’s doing well (so you are “selling low”) — and no one adds a fund that’s doing poorly (so you’re “buying high”). Is that not exactly the opposite of what conventional wisdom says you’re supposed to do? Is that not the very definition of “chasing returns”?

So your problem may not be that you don’t have an advisor.  More likely, your problem is that you have an advisor who told you to have actively managed funds in your plan and that he now performs the admirable service of making periodic changes to find you better ones. The data says that strategy fails with amazing frequency. Everybody thinks their advisor is the exception to the data-proven rule, or you wouldn’t have him around. But think about this: The fund your genius is telling you to buy….someone else’s genius is telling them to sell.

 

Want to see how your actively managed funds are doing against just the S&P index for example? Go to Yahoo Finance. You can readily check out your actively managed funds, for any period of time, against an index. If you take the time to do it, one of two things should happen: You dump your advisor and your actively managed funds and join the 401k Revolt;  or,  you insist that your advisor start taking you to places like the Bahamas. Which one do you think is the best course for a plan fiduciary?

401k Numbers Say Time for Revolt has Come!

5 Reasons to Overthrow Your 401k TODAY

1. It's too expensive.  Hear this—your plan costs you and your participants way too much.  Your advisor might tell you that he has reviewed it and it's "in line" with the industry.  He might quote the Department of Labor's contention that "401K costs are trending down."  But even if that’s accurate, they have A LOT farther to fall; "reasonableness" shouldn’t be based on the collective failure of the industry.  A typical 401K plan, comprised of actively managed funds costs about 150 basis points on average.  It can and should cost closer to 40.  Is your cost really “reasonable” at 145?!

2. Index funds outperform actively managed funds 80% of the time.  Don't believe it?  There are endless studies that prove it.  Check out the latest Dalbar Study for great set of numbers and charts.  Why on earth would you subject your employees’ money to higher, non-productive cost? Actively managed funds outperform the index so infrequently (and the rare winners never repeat), the event can only be characterized as a lucky guess.  Wouldn’t you rather tell employees that your plan helps them succeed by not subjecting them to guesswork and excessive cost?

3. Employees aren't participating.  Depending on the industry, 40-60% participation is the norm.  Put another way, that’s 40-60% of employees that don’t have a retirement plan.  Does that meet your definition of success? 

 

4. Participants are lost and have no hope.   

Lost:  According to a recent Charles Schwab survey, “But more than half of the 401(k) savers said their plan’s investment options are more confusing than their health-care benefits, and 57% said they wish it were easier to choose among their plan’s investing choices.

Forty-six percent of savers said they don’t know what their best investment options are, and 34% said deciding how to invest in their 401(k) is causing them a lot of stress. (The survey respondents ranged in age from 25 to 75, and worked at companies with 25 or more employees.)”

No Hope:  According to a recent article on Yahoo Finance, only 13% of people with 401K accounts think they will have enough to retire with.  

5.  Its highly likely that you can lower the cost of your plan by 50% or more and make it more successful for both your company and your employees.  Do you still have actively-managed funds in your plan?  Are you still hoping to turn employees/participants into investment pros?  Are nearly all your people in your plan?  Are your participants saving enough?  Are participants exhibiting good investment behavior with their accumulated savings?  Only you know the answers to these questions and only you know whether your plan is successful.  If it’s not, it’s time to overthrow your plan and the advisor(s) that got you to where you are today.

Rest assured—there is a better way!  Visit us at www.401kRevolt.com to learn more!