Erollover.com 2008

By Jonathan Burton



How good are the mutual funds in your 401(k)?

It would be nice if there were a scorecard. But rating the investments you hope will glitter in your golden years can be a confusing process. That’s one reason why so many investors have embraced so-called target-date or lifecycle funds, which take care of the guesswork.

Those who still want to pick their own 401(k) investment lineup often don’t know how, or where, to start. So they wind up defaulting to funds with the best track records.

That’s not strategy, it’s performance chasing — buying high and selling low — and it leads investors nowhere, says David B. Armstrong, managing director at Monument Wealth Management, in Alexandria, Va.

“They’re picking mutual funds that have been doing very well and not giving proper consideration to the appropriate allocation,” he says.

To tell which stock funds in your retirement account are right for you, look beyond performance. Take a page from the methods investment experts likely used for your own company’s 401(k) plan. Here are five things to keep in mind:

1. Expenses

In many cases, 401(k) plans offer one actively managed fund and one indexed alternative. Since indexed management is usually cheaper, make sure you’re getting your money’s worth from an actively run choice.

Costs matter. An index fund that charges one-tenth of a percentage point in yearly management fees, for example, has a full percentage point head start over a fund that takes 1.1%.

Accordingly, the manager of the more expensive portfolio has a steep hurdle to deliver above-average returns over time. Don’t pay top dollar for mediocre results.

“Every penny we can save on expenses is going to translate to better performance,” says Donald Trone, president of the Foundation for Fiduciary Studies, which educates investment advisers.

2. Risk-Adjusted Return

You can’t judge a fund by its advertised performance. Understand the risks a manager took to generate those returns — maybe the fund loaded up on a hot stock, or the manager traded frequently, playing the market’s momentum. Otherwise, you run a risk too — that you’ll fork over good money to a fund that exposed you to more volatility that you can comfortably handle.

“Big stakes in any one sector is good reason to dig deeper,” says Christine Benz, director of personal finance at investment researcher Morningstar. “How does that fit with the manager’s strategy, and how has that played out for the fund?”

One key measure of a fund’s risk-adjusted return is a technical term called standard deviation. It shows how much a fund’s performance varies, or deviates, from its expected return.

You won’t need a slide rule. Sites such as Morningstar.com do the math for you. Click on “Risk Measures.” The bigger the number, the more risky the fund. So if Fund A gained 11% with a standard deviation of 18, and Fund B rose 10% with a standard deviation of 12, then Fund B achieved almost the same results with two-thirds of the volatility and would have a better risk-adjusted return.

“Standard deviation can help you see which fund has had higher volatility and has probably been taking more risks,” Ms. Benz says.

3. Results vs. Peers

You also want to look at a fund’s performance relative to its category. Investors frequently make the mistake of comparing funds with “the market,” which usually means the benchmark Standard & Poor’s 500-stock index.

But the S&P 500 is a large-company U.S. stock index. The only funds to rate against it are large-cap U.S. stock funds; anything else is simply misplaced.

A small-cap stock fund may look great compared with the S&P 500, but it may have underperformed the more fitting Russell 2000 Index benchmark. Similarly, an international small-cap stock fund has no business in the same pool as its U.S. small-cap counterpart. Again, Morningstar.com makes this information readily available. Click on “Total Returns” to see how a fund stacks up in its category.

Be sure that all of your fund choices are related, says Mr. Armstrong, the Virginia financial adviser. If they’re not, “you really can’t determine if the portfolio manager is doing a good job” or if you should just buy an index fund.

4. Portfolio Yield

Performance-chasing is bad enough, but investors also reach for yield — the dividend income that can provide a cushion in difficult markets.

“I’ve seen clients get stars in their eyes over a high yield,” Mr. Armstrong says. They forget there’s a reason for this excess payout — and not always a good one.

Beware of a fund with a yield that’s out of synch with its peers. Maybe the high yield comes from a heavy dose of financial-services stocks or lower-quality investments. In that case, not only is the yield shaky — some banks have cut or eliminated their dividends, for example — but even the most generous dividend won’t offset major declines.

5. Manager Tenure

The big consulting firms that cobble 401(k) plans together grow cautious when a fund switches managers. And you should, too.

Fund companies will protest to the contrary, but new managers are game-changers. While the fund’s investment style might not be drastically altered, you can bet the portfolio itself will get a makeover.

If a fund manager has been on the job for only a year, then the fund’s three- and five-year performance isn’t his to boast about.

You can be more charitable when a new manager is a veteran who has experienced bull- and bear-market cycles.

Says Lou Stanasolovich, president of Legend Financial Advisors in Pittsburgh, Pa.: “If a manager changes, you’re in effect starting a new fund.”

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Erollover.com 2008

Now Is The Time To Open Your 401k For Retirement

Submitted By: Rebecca Game

What is a 401(k) plan?

The name is derived from the Internal Revenue Code established in 1978. It’s presently administered by the government section called the Employee Benefits Security Administration, also known as the EBSA.

A 401(k) plan is a plan usually used for retirement and is funded by an employee contribution. Some companies will match the contributions up to 100% of the employee’s contribution and yet some companies do not offer any matching funding. The BNSF Railroad is one of these such companies that does not offer even a $1 match for their employees.

The funds are contributed from the employee’s paycheck BEFORE taxes. The fund will accumulate completely tax free until it is withdrawn. Most businesses or companies have these retirement plans in place or they can create them.

There are a lot of advantages of having a 401K plan:

1. Employees can contribute pre-tax money which helps reduce the tax owed from their paychecks.

2. Any company contributions are also tax free until withdrawn.

3. As the funds are compounding, you are attaining a good profit on your invested funds.

4. The money you have funded in the plan can be moved around from one company to another. This isn’t available in a pension.

5. Your 401K is also protected from garnishments and is protected by pension laws because it is a personal investment plan. The only time it is not protected from garnishments is in domestic caes or cases of child support, but it IS protected from creditors.

6. You can borrow against your own 401(k) and the payments you make are put back into your own account along with the interest. The interest you pay on the loan is paid to you as well. You are actually borrowing the money from yourself and paying yourself back with interest. Most plans only allow you to borrow up to 50% of your fund account and only 2 loans at a time. You can borrow more than once if you find yourself in a financial hardship.

You should note that it is hard to get your contributions, (aside from a loan), before the age of 60 without paying a lot of penalty fees. The penalty fees can take a lot of the interest profit you may have received over the years. The plan is not insured by the Pension Benefit Gauranty Corporation, also known as the PBGC.

You do have many options for investing in your 401K plan. You will usually be investing in mutual funds. This helps protect you from having all your eggs in one basket. Mutual funds can consist of:

Money market funds
Treasuries
Stock funds
Bond funds

Since the 401K plan is a long term investment, it should be able to handle market fluctuations without damage to your fund. Since stocks usually outperform other types of investment this is a great option for retirement security.

About the Author
Rebecca Game is the founder of Digital Women ®, an online community for women in business. A 30 year entrepreneur and dedicated to helping other women find business loans and business grants. Visit her site: http://www.digital-women.com Loans for Women http://www.digital-women.com

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