401(k) Madness

All across America, a familiar ritual is repeated at least quarterly. Sponsors of 401(k) plans meet with their brokers, insurance companies or other advisers. The purpose of the meeting is to decide which funds to keep as investment options and which ones to eliminate. Everyone has a familiar role. The plan adviser comes prepared with data demonstrating why certain fund managers aren’t performing and need to be eliminated. The data are quite convincing. They show significant underperformance compared with the fund’s benchmark index.

Choosing a replacement for underperforming funds is quite simple. The adviser explains the results of a “comprehensive analysis” of thousands of funds. This analysis winnows down the “winners.” The plan sponsor and the adviser solemnly debate which fund should be selected. An agreement is reached. The sub-performing funds are bounced. New ones are selected.

Because this scenario occurs with such frequency, it’s difficult to track which funds were once included in the plan and then eliminated. I have seen situations in which brokers have recommended funds for inclusion, subsequently excluded them and then later recommend they once again be included.

Read the rest of the article at The Huffington Post.