[Part 1: Selecting a provider, Part 2: Selecting the investment options]
In this second part, we look at some of the investment options selected for the 401(k) plan. As a recap, the following were the objectives of the plan:
- The Plan offers a choice of low cost mutual funds that cover diversified asset classes, and
- The Plan is not overly expensive for the company to sponsor.
Based on the criteria given, the following requirements were put forth:
- Simplicity — Provide three core asset classes for those who value simplicity.
- Diversification — Provide exposure to the entire U.S. stock market, most of the international stock market and the U.S. aggregate bond market.
- Low expenses — mutual funds with low expense ratios.
- Target Retirement funds that own the core investments, rebalance automatically and become more conservative over time.
I worked with the Vanguard representatives, and came up with the following list of Vanguard mutual funds:
For ease of understanding, the investment options are divided into four groups.
- Group A : This group consists of Target Retirement funds. These funds are for those who prefer simplicity above all else. Participants just pick the ONE fund that most closely matches the planned retirement year. These funds own all the core asset classes, re-balance automatically and become more conservative over time.
- Group B : This group offers the core asset classes as individual funds for participants to mix and match their desired ratio. Participants can also use Group B to semi-manage and re-balance their portfolio in concert with their IRA or taxable account investments.
- Group C : This group offers additional asset classes for participants who want to duplicate Fama-French’s research.
- Group D : This group offers cash equivalent investments, either a stable value fund or the federal money market, or both.
Q. How are the investments options selected?
A. The investment options, in particular Groups A and B options, are modeled based upon the Federal Government’s Thrift Savings Plan (www.tsp.gov). The TSP is the largest defined contribution plan in the world and one of the very best. More information on TSP is available from searching on the web, e.g. from CBS News:
Q. Why are there so many index funds?
A. Index funds have no manager risk, no style drift, no asset bloat, no fund overlap and never below average performance. For comparison to actively managed funds, please refer to this report which studies the relative outperformance or underperformance of actively managed funds against their benchmarks.
Q. I want to use the Target Retirement fund. Which one should I choose?
A. Please use this link from Vanguard
to get more information. It helps you choose the appropriate fund given your age or years to retirement.
Q. What are the participant fees for the 401(k) plan?
A. The fees range from 0.05% to 0.31% per year. So on a $10,000 balance, participants will be paying not more than $31 per year.
Note that these fees are already reflected in the fund’s daily quoted price, i.e. there is no separate annual account fee. There is an administrative cost to sponsor the Plan; that cost is borne by the company.