Talk about a bad way to spend a Friday.
I was sweating through the mind-numbing process of updating my finance software with fund information from the horrific tangle of Web interfaces I'm forced to use as a 401(k) customer of Prudential
Oddly enough, this chore proved to be a blessing in disguise, because it forced me to realize that there's something much much worse than Prudential's Web investment interface. It's Prudential's funds -- at least the few I have access to.
Before we get to that, let's get one thing straight. I'm a stock guy, and here's why:
I don't like the odds in Fundland. There, 80% of the managers lose to the averages -- or whatever the latest failure rate is. (Of the funds I can choose from, not a single one can boast 10% returns since inception. The average annual return for this crop of losers is 6.3%!). For this great service, these underperforming chumps are rewarded with continuing business? Yes. There are thousands more funds out there than there are stocks!
I don't like the diworseification of Fundland. Though my odds are obviously better with an index fund than with a Fundland special, I'm not really all that thrilled about index funds either. I already own enough shares of Microsoft
I don't like the conflicts of interest in Fundland. This is a place where folks peddling funds to retirement plans, walk-in customers, and others might not be giving full disclosure. People scarcely talk about the mutual back-scratching societies at work -- arrangements that may not (and in most cases probably do not) work to the benefit of us Average Joes.
I don't like the fees in Fundland. Management fees and loads for most funds are outrageous. I'll just give you another example from my good old 401(k) funds.The fees for the large-cap "value" fund are anything but a value. They charge 1.25% for long-term performance that is consistently lower than the benchmark index (see point one). By the way, they claim that their performance is net of fees but before any "contract related" charges. How much are those? No one at Prudential could tell me a couple of weeks ago. They still haven't bothered to send me the information.
Get thee to the fine print
Here's the sadder news: I know I'm not the only one in this predicament. And I doubt that most of the people suffering from the same underperforming fund industry even realize what they're missing. When a full third of Americans with access to 401(k) plans don't bother to take part, and our overall national savings rate is an abysmal -0.5%, how many people out there are taking the extra steps to track the performance of their fund investments?
Unfortunately, if you hope to maximize your retirement nest egg, you need to pay attention to these very issues. You need to find out how much of your hard-earned money is going to the fund managers. You need to measure their performance against the brainless benchmarks that you can buy at a low cost. (And they'd better be winning that race.) You need to take control.
But suppose you find out, as I did, that your fund managers are woefully underperforming -- that not only are they losing to the benchmarks, but also they don't even want to tell you how big their cut of your money is. With more funds out there than stocks, how would you even begin to find a better deal?
On that fateful Friday -- I'm being completely honest here -- this 100% stock guy found himself begging to be able to take advantage of the kinds of funds his colleague Shannon Zimmerman digs up for his Fundtopia, otherwise known as Motley Fool Champion Funds. That's because Shannon works his tail off every month to find the few offerings out there that are free of the Fundland shenanigans described above. Shannon also avoids the loads and holds a firm line on fees. He looks for international funds, bond funds, mixed funds, and most importantly, honest, competent managers. (They are out there.)
That's why, in Shannon's Fundtopia, your odds are about a zillion times better. Instead of Fundland's 80% fail rate, you've got a near-90% success rate. Not only are 88% of his picks beating the benchmark S&P 500, but they're doing it by a combined 10 percentage points, with results tracked on a live scorecard so you can check things for yourself. (Compare that to the pitiful once-a-month update I get from Fundland, the one that shows results before they take their unspecified cut.)
Shannon's great track record may not be enough to get me to abandon my beloved stocks, but you're not me. If you have a place in your portfolio for funds, and want to avoid the funny business in Fundland, give Champion Funds a try. I can tell you firsthand: The alternative is very ugly.
Seth Jayson would probably give up his dividends to get market-beating Champ funds into his 401(k), but he's not holding his breath. At the time of publication, he had positions in the two house-brand funds he discussed above, and shares of Microsoft, but no position in any other fund or stock mentioned. View his stock holdings and Fool profile here. Microsoft is a Motley Fool Inside Value recommendation. Fool rules are here.