The mutual funds your plan administrator chooses has an impact on how well your 401(k) retirement plan performs, reports a study released this month by the Center for Retirement Research at Boston College.
It's a retirement planning truth that most of us have long expected. If there is a surprise, it is probably in how small the impact appears to be.
The study, which looked at data from a random sampling of 401(k) plans provided to the Securities and Exchange Commission, shows that while there is room for improvement, overall the plan index fund results weren't much worse than those of comparable index funds that were not part of the plan. Actively managed funds in these 401(k) plans actually outperformed their relevant market indexes.
But not by much. The index funds made about three-tenths of a percentage point less than comparable funds, mostly because of the higher fees tacked on them by the plan administrators. The actively managed funds did about a half a percentage point better, apparently because administrators traded funds in and out, seeking higher returns. The study was critical of administrators who "chased" returns, pointing out that while newly added funds had historically outperformed the funds they replaced, after they were added to the mix, they didn't do as well. Over time, the study maintained that the 401(k)s would have performed no differently if the plan managers had just left the original funds in place.
The study further concluded that 401(k) participants don't do much to help themselves. They don't rebalance to reflect returns or increase contributions. It suggested that a participant's best strategy is to adopt what it calls the "1/N rule," allocating money equally across all available fund types.