Even before the Dow Jones industrial average briefly cracked 10,000 last week, 401(k) investor confidence was on the rise.
That, according to a recent Fidelity Investments survey of 401(k) plan participants, as well as the Hewitt Associates 401(k) index, which tracks investment trends among plan participants nationwide. Indeed, the Hewitt index reveals that participants began slowly shifting 401(k) holdings out of cash and into stock funds (and company stock) in the last few days of February, when the Dow began its move toward 10,000.
Now, if you're feeling more confident and you're thinking of shifting a portion of your 401(k) assets out of cash and into a stock fund, which fund in your plan should you choose?
The answer, of course, will depend a great deal on the investment choices offered by your company's plan, as well as on your investment needs, your time horizon and the investments you have outside your 401(k).
Having said that, several 401(k) experts and investment advisors have a suggestion: Search for funds the way shrewd consumers shop for other goods. Don't get hung up on brand names. Stick to real bread-and-butter issues such as quality and cost.
Within the fund industry, there's a growing debate as to how investors think of their funds.
Are mutual funds regarded by investors as full-fledged financial relationships between them and the fund company? Or, as Jeffrey Shames, chief executive of Boston-based MFS Investment Management, argues, are they regarded--and marketed--as commodities like toothpaste or paper towels?
Says Shames: "I don't think what we're doing is much different than Gillette, or Procter & Gamble selling Tide."
While there's a clear downside to thinking of all mutual funds as commodities--after all, you don't change banks every week, but you may toggle frequently between different brands of breakfast cereal--there is an argument for thinking of your 401(k) investment options this way, within reason.
Can't the case be made, for instance, that 401(k) plans are supermarkets of funds and other investments for your retirement? Obviously, while some are truly "super" markets, others may be tiny bodegas that carry a poor selection of items and brands.
By viewing your 401(k) investments as goods competing on a market shelf--or better yet, as cars showcased at an auto mall (after all, cars are big-ticket, long-term commodity purchases), you can go about shopping for funds like any smart shopper.
In other words, you can concentrate on the quality of the product--i.e., does this fund deliver solid returns?--and its affordability--i.e., is its expense ratio low, or at least justified by the quality?
Obviously, not all of us are fortunate to have a decent selection of funds to choose from in our plans. But if you are, consider the following advice of 401(k) plan experts. Once you weed out those funds in your 401(k) that a) don't suit your investment needs; b) are redundant with investments you have outside your 401(k); or c) are poor in quality:
* Do a little comparison-shopping. When you go to the supermarket and come across two brands of orange juice, each of which satisfies your taste buds, or you go to an auto dealer and spot two cars, each of which meets your needs and wants, what do you do?
"All things being equal, you go with the cheaper one," said New York Life Benefit Services Chief Executive Joel Disend.
Yet many plan participants forget this when it comes to their investments, says Catherine McBreen, head of the Spectrem Group's retirement consulting practice in Chicago.
As with any ordinary mutual fund, there are costs associated with funds in 401(k)s. For instance, a fund with an "expense ratio" of 1.5% (which is the average rate) takes away $1,500 every year for every $100,000 you invest.
By comparison, a fund with an expense ratio of 0.5% (which many "index" funds charge) takes away $1,000 less.
Ask your plan sponsor for expense ratio information. Many times, it will be printed in pre-published plan brochures.
* Don't automatically rule out generic brands. A growing number of large-employer plans are offering investors "commingled" accounts or pools. Think of these as private-label funds that large 401(k) plans can ask money managers to create.
For instance, if a large employer wants to offer its workers access to Fund XYZ but decides the fund's expenses are too high, the plan may be able to ask the fund company to create a similar product but with lower expenses (if the plan is big enough). The commingled pool won't have a sexy "brand name" you'll recognize, but it may be just as good.
Notes Luke Collins, director of KPMG's investment consulting practice in Chicago: "To a certain extent, corn flakes are just corn flakes."
Unfortunately, these portfolios' closing prices aren't going to be listed in your local newspaper. However, a growing number of plan sponsors are making this information available to participants via phone or the Web, Collins said.