Fund diversity, not fees, should be top 401(k) concern

Congress and consumer advocates have recently jumped on 401(k) plans for not disclosing costs, saying the mystery fees are eating away at retirement savings.

An AARP survey found that eight out of 10 participants in the employer-sponsored retirement plans were unaware of fees and expenses. That survey is giving critics armor for fighting for disclosure, which currently is not required.

Rep. George Miller, D-Calif., and chairman of the House Education and Labor Committee, proposed a bill last week that would mandate 401(k) fee disclosure, mainly information on the expense of pension consultants and administrators.

Although knowing what you’re paying for is a good idea, if you’re saving for retirement in a 401(k) plan, don’t let the fees distract you from other important factors in managing your plan.

“People naturally put too much emphasis on fees,” said Denisa Tova, a certified financial planner in Colorado Springs.

She worries that highlighting fees may scare employees away from 401(k)s and that they will miss out on the benefits, which include saving for retirement and capitalizing on employer contributions.

Instead, focus on asset allocation, or spreading money across funds with different objectives, to build a strong mix of diversified investments, she said.

Too often employees get carried away with a favorite investment strategy, such as putting everything in company stock or not being aggressive when young or being too conservative as they age.

“Lack of diversity is the most prominent issue I see,” she said. “It is due to misunderstanding the true concept of diversification. It’s not quantity, it’s quality.”

The most successful 401(k)s are those with appropriate asset allocation, Tova said.

To help diversify a 401(k), she recommends checking Morningstar’s style boxes (www.morningstar.com or get printed copies at the library), which group funds by categories (see sample with the FundFocus on page 3 of the Business section). If fund choices are in the same style box, pick the best one by then comparing performance and star rankings (Morningstar’s scale is 1 to 5 stars, with 5 the highest). The five- to 10-year performances are the best indicator of how a fund performs.

Once you’ve narrowed choices from this information, then compare fees. One can pick the fund with the lowest fee when everything else measures up equally, she said.

“If you pick and choose different asset allocations not related, you automatically minimize risk and increase return,” she said. You can accomplish this with as few as four funds.

Once you’ve made your choices, the only thing left is to rebalance once a year to prevent any fund growth from throwing off the diversification.

CONTACT THE WRITER: dan.serra@gazette.com