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Less is more when it comes to 401(k) funds

01/12/2010:

There are two things you want less of with your 401(k) funds:

1) Expenses (as we say, costs are a drag!)

2) Lots and lots of choices for your employees

A fund must overcome every expense it incurs to try to equal its benchmark -- typically a market index such as the S&P 500. The higher the expense, the tougher it tends to be. The best investment managers find it difficult to consistently overcome high expenses, and this reason is why we only offer low-expense index funds (ETFs) for our stock and bond funds.

And surprisingly, or maybe not when you take a step back, the more fund options offered in your 401(k) plan, the fewer employees that will participate in your program. That’s right, the more choice, the less participation you will see. This starts happening around 12 to 16 options according to various studies.

The important thing is to cover the major asset classes plus a few core specialty funds and keep the investment options straightforward. This helps make it easier for everyone to get started and on their way to reaching their goals.

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