Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Wednesday, July 03, 2013

Evolving 401(k) Slates

I see a lot of 401(k) fund slates from clients of varying quality. Tragically, many that I see are made up of high fee, erratically performing, actively managed mutual funds. On top of that, they may not even have very good diversification!

Fortunately, things are changing in the 401(k) world.

  • Passive index funds are more prevalent now. While not all index funds are equal, they typically have lower expense ratios than active funds, and have negligible risk of style drift or benchmark divergence.
  • Target date funds are making an appearance. These make an easy one stop shop for a worker, especially when their 401(k) balance is small. Even if the rest of the slate is poor, a single target date fund will generally have an appropriate, diverse mix for your age.
  • ETFs! Wisdomtree has been working on getting their ETFs into 401(k) plans already and word is that Schwab has 'cracked the code' to get ETFs to fit and work in a 401(k) plan. While I have yet to see these in practice, they should even the playing field as far as expense ratios go, since ETFs only have one share class with one expense ratio. Additionally, ETFs offer transparency which may be of some use to the investor, but will serve as deeper scrutiny for managers.
Simpler, better diversified slates are becoming the norm. Cutting costs is very beneficial to these long term investors. Overall, the trends are beneficial to 401(k) savers.