(This article appeared previously on MarketWatch.com.)
After studying the 401(k) plans of 100 of the largest U.S. corporations and foreign companies with American subsidiaries, I’ve come to the conclusion that the vast majority of them fail one test — a good menu of investment choices.
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Choice of Asset Classes is Key
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- U.S. small-cap value stocks, over the past 50 years, returned more than five percentage points than the S&P 500. But only a third of the 100 plans give participants that choice.
- International small-cap value stocks have had similar returns, but if you're in one of the 100 biggest plans, there's only a 10 percent chance you can find an international small-cap value fund.
- While 88 percent of these plans offer U.S. small-cap stocks (another very productive asset class), fewer than one-quarter of them offer the equally attractive international small-cap asset class. Fewer than 40 percent of plans offer an emerging markets fund, even though many believe this asset class will have the best future long-term returns.
- Only about one-third of these plans offer a real estate investment trust (REIT) option. That's too bad, because REITs have outperformed the S&P 500 by 0.5 percent while moving up and down at different times, giving investors more return with less volatility.
- Most plans offer target-date funds, which are fine for people who want simple solutions and are willing to give up a percentage point or two of long-term return. But participants who want to pick from individual funds must navigate some quirks.
- Costco's plan doesn't offer any international funds or value funds
- Verizon offers its employees a bewildering 130 options; at American Electric Power the choices total more than 600. I think this hurts more people than it helps, even though the company's attorneys can argue that the plan gives a full range of choices.
- Exxon Mobil's plan has no small-cap, value, emerging markets or REIT funds.
- Participants in the Royal Dutch Shell plan and that of privately held Fidelity Investments have access to all my recommended asset classes except international small-cap value. However, Shell's plan has too many choices (more than 340).
How to Tweak Your Plan
While individual 401(k) participants can't fix these shortcomings, those who care can make the most of the options available to them.
If you're not sure which right is for you, choose the moderate plan. The only difference in each case is the ratio of equity funds to bond funds.
Paul Merriman is founder of Merriman Wealth Management, a Seattle-based investment advisory firm, and president of The Merriman Financial Education Foundation. Paul writes a weekly column for MarketWatch's The RetireMentors and records a weekly podcast, Sound Investing. Follow Paul on Twitter @SavvyInvestorPM.
Richard Buck contributed to this article.
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