Ranking of 401K Investing Committees

By law, every single 401k plan should have in place an investment committee that decides which mutual funds to offer and which mutual funds to pull (after they’ve been offered). In fact, the criteria they use to make that decision should also be written down on paper as well so that employees are aware of how the decisions are made. Unfortunately, either employees don’t know or don’t care how this is done and just assume that the committee is doing their job and every committee is the same. They, however, are not all the same and so MarketWatch asked fi360 Fiduciary Analytics to review some of the mutual funds most often found in 401k plans. Of the forty they reviewed, 28 were okay but 12 required a closer look, so in general all was well.

How did they perform the analysis? First, they checked to see that what the fund said they were investing in was truly what they were investing in. If it’s a large cap fund, was it investing in large caps or did it sprinkle in a lot of small cap companies as well? Is it a growth fund or did it start as a growth and slowly mature into a value fund? The funds were put into three general buckets, Pass, Appropriate, and Watch. Pass meant the fund was awesome, appropriate said there was a little deviation but that was okay, and watch was bad.

The results were pretty amazing only in that they reinforced my respect and trust for one of the biggest mutual fund names and where I keep most of my retirement assets: Vanguard. Of the seven Vanguard funds listed, only one did not pass – the Vanguard Total Bond Index had a score of 16 out of 100 (100 being the worst and passes being 0’s). Fidelity also made the list with seventeen funds, a sign of their popularity, of which 7 passed, 5 were appropriate, and 5 deserved to be watched.

Who ranked the worst? Templeton Foreign scored the worst with an 84 which put them in the watch(4) category – that is the fund should not be used in a 401k fund! Second worst was American Funds Investment Co. of America with a 78, a watch(4) fund as well.

Check the list and see if any of the funds you’re in is on it and what you might want to consider doing.