I recently reviewed a client’s 401(k) account. He works for local technology company. The 401(k) plan is administered by a major insurance company. It offers proprietary funds from the insurance company and a number of actively managed funds. There are no passive funds available to participants.
I encouraged my client to contact the human resources department and express an interest in adding index funds to the menu of options. I explained that passively managed index funds capture the returns of the market (minus internal expenses). Actively managed funds are more expensive and routinely fail to beat their comparable index.
The Wall Street Journal ran an article recently indicating that employers are increasingly offering index funds inside their company 401(k) plans. Currently 90% of the $1.5 trillion in 401(k) and other defined contribution assets in mutual funds are invested in actively managed offerings. The article noted that fund companies prefer actively managed funds because they produce fees that are higher than index funds.
The 401(k) industry is in need of reform. Documents provided to plan participants fail to properly disclose expenses. These expenses drag down the performance realized by plan participants. The federal government is currently considering revising the laws surrounding 401(k) plans. Let’s hope our lawmakers have the fortitude to resist pressure from the major financial institutions to preserve the status quo.
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Index funds seem to be quite a good investment option, though they don’t give you whooping returns, over a period of time they grow steadily to give you good returns. There are some merits like, You get the cream of mutual funds, Don’t have to keep a track of individual stocks, Indexed funds are better performers than active funds, like this there are some demerits also such as, it is expensive stocks, Stocks only from within index range. For detail information on these points refer index funds
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