How sad is this? Americans in general aren't saving enough for retirement -- and many are therefore destined to suffer through gruesome retirements. We often have access to tax-advantaged savings plans at work, such as 401(k)s, but many of us are not taking advantage of them. Still, many are -- and their ranks are growing, at least in part because many employers are now auto-enrolling new workers.
Here's the problem, though: Even though broad-market index funds have long outperformed the vast majority of managed mutual funds, it seems that some 90% of the money in 401(k)s and their brethren is in managed funds. Sure, some such funds are stellar. The Osterweis (OSTFX) fund, for example, has handily trounced the S&P 500 over the past three, five and 10 years -- and recently included AT&T (NYSE:T), Johnson & Johnson (NYSE:JNJ), and Diageo (NYSE:DEO) among its top holdings.
But most managed funds aren't stellar, which is one reason why index funds beat them. Another reason is fees: A typical managed stock fund will have an annual expense ratio of 1% or more, while plenty of index funds sport fees lower than 0.20%.
What's going on?
It seems like a head-scratcher, until you realize that many plan administrators at many companies just aren't stopping to ask themselves whether they're offering their employees the best investment options in their plans. They may not appreciate the power of index funds (and their close cousins, exchange-traded funds, or ETFs), themselves.
There's also a conflict of interest at play, sometimes, as some managed funds "share" revenues with plan administrators.
What to do
It's up to you to look out for your financial interests. Find out what your 401(k) investment options are. If there's no index fund, ask for one. Park your money in the best investments you can find, which might include some managed funds. Also check to see if there's a Roth 401(k) available to you -- these new beasts will let you ultimately withdraw your money tax-free, so they're well worth considering. Companies such as IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), Verizon (NYSE:VZ), and Google (NASDAQ:GOOG) now offer them -- ask your HR department if your employer does too.
You'll find more guidance in our Rule Your Retirement newsletter, which you can try for free.
Some more retirement investment Foolishness for you:
- 10 Dividend Stocks for the Next Decade
- A Retirement Portfolio You Can Set and Forget
- 3 Investment Myths
Start investing today -- just $7 per trade with Scottrade. Or find the broker that's right for you.
