Needless to say, MetLife has replaced Fidelity as the Plan Administrator. I've been told that we employees have no say in this switch. Ignoring asset-class diversification, what do these funds look like? What are their expense ratios? How have they performed? What is your take on this?
---Sign me, Faithful Reader who thinks this doesn't pass the "Smell Test!"
A. This change passes the "smell test" but indicates that your employer is still buying into the fund management game that continues to reward investment management companies at the expense of their investors. Your original plan is pretty close to the standard Fidelity template for its 401k plans--- an offering of Magellan fund, a number of other Fidelity funds, some funds from other fund firms, and its Freedom funds, which are "fund of funds" within the Fidelity group.
Fidelity funds have lower expense ratios than average. They also tend to have somewhat superior performance. In addition, they have the brand recognition that many employers value more than performance.
Unfortunately, Fidelity continues to offer its flagship Magellan fund even though few investment consultants would put Magellan on its fund choice list. According to Morningstar, Magellan has trailed its target index, the Standard and Poor's 500, in the 3 months ending March 31, the last 12 months, the last 3 years, the last 5 years, the last 10 years, and the last 15 years. In every time period out to 5 years the fund has been in the bottom 25 percent of its peer group. At 10 years it was in the bottom 50 percent of its peer group.
The other funds include Puritan, a 4 star fund with a great long-term record and several other 4 star funds with good records and relatively low expenses. None of the Fidelity funds, for instance, has an expense ratio over 1.0 percent.
Your employer may have tired of waiting for Fidelity to do the right thing and take Magellan out of its lineup.
The MetLife offerings have consistently higher ratings from Morningstar and consistently higher expense ratios. Most have expense ratios well over 1.00 percent a year. You'll have to check with your plan to learn which class of shares the plan will actually have because that determines the expense ratio. Depending on which funds employees choose, the new plan will have nearly double the costs of the Fidelity plan.
Whether that expense is worthwhile will depend on future performance.
Within the conventional wisdom, your employer has traded low expense funds for higher expense funds with better track records. This choice gives comfort to your employer while it assures both the consultants and the investment managers of continued income from your investments. Your new plan passes the smell test. Some would argue that it fails the thinking test.
Since expenses will out, it may also work to reduce your long-term return and your retirement nest egg. It's a shame corporate managements can't be as diligent about cost reduction in 401(k) plans as they are about cost reduction elsewhere.
Q. Joe Louis once said, "I don't like money, actually, but it quiets my nerves." Have our nerves been quieted at all since the Bush administration took over in 2001 as shown by the Dow, NASDAQ, and S&P averages?
---L.S., by e-mail from Plano, TX
A. This is a loaded question. It assumes there is a one-to-one relationship between politicians in office and the stock market. There is some relationship but it is far less than one-to-one. A better measure of "nerves" may be found in the consumer balance sheet, the collective mixture of assets and liabilities that measures our broad financial condition.
Those figures, which are available in the quarterly Federal Reserve Flow of Funds report, show that the value of our financial assets has risen strongly since the bursting of the Internet bubble, that our real estate holdings have soared, and that our collective net worth was at a new record level at the end of 2004.
If money calms "nerves," we ought to be dangerously tranquil.
Other concerns, however, trump money. Since September 11, 2001 we have been living with a heightened sense of vulnerability. It colors what we experience and adds a large measure of uncertainty to everything we do, including our investments.
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.
AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.