Wealth Management
Wise options
Does your company's 401(k) plan offer elements that help your employees succeed?
By Marc Heilweil
Smart Business Atlanta | August 2004
Whenever constituents suffer losses or are unhappy, they ask the government, "What are you going to do about it?"
Eager to please, the government tries to fix things. In the case of the Sarbanes-Oxley Act, I have argued elsewhere that the solution penalizes American business by putting it more in the hands of the large accounting and law firms that sanctioned the abuses in the first place. In the case of mutual funds, reforms are, once again, based on legal reasoning rather than practical notions.
So let's examine mutual fund management, especially in the 401(k) world.
Some younger readers may not realize the change in landscape between the world of today and that of a generation ago, when most employees had their retirement taken care of by their employer. Today, at least in the private sector, it is in employees' own hands through mutual funds. Individuals must make their own choices in a 401(k) plan.
The old system had two elements that allowed it to work. First, the company officers responsible could meet directly with the managers of the investments, and second, the company could adopt an appropriately long horizon for making the investments.
While one would expect to find these elements in mutual funds as well, many of the trends head in the opposite direction. For example, shareholder letters should allow the money manager to speak openly and directly to funds investors.
Myriad regulations make this communication more and more the domain of lawyers and compliance officers. As a result, some funds have retreated from offering these letters. The thought process of the manager writing the letter is subverted by regulatory demands. By restricting honest communication, the investor's education and ability to make informed evaluation is limited.
More important is the ability to make wise long-term choices. There are two factors at play. The most familiar is the need to think beyond the short term. The more subtle issue is the need to make decisions from a bewildering array of choices.
Employees are confronted with choices that baffle the most able and experienced of investors. They must choose between "growth" and "value," and among large, mid-cap and small capitalization funds. Additionally, they are asked to choose between domestic and international equities and an array of fixed income opportunities.
We all know how the fund industry has adopted the familiar consumer strategy of segmenting. Funds distinguish themselves by standing out in a category, not by offering the investor a broad exposure to the equity market. In fact, a broader-based fund that takes such an approach is guaranteed to lag in the category into which it is placed.
Employers would be wise to look for the company's 40l(k) solutions -- funds that incorporate the elements that will help their employees succeed. They should see to it that honest and wise communication is available to their employees. They should winnow their employees' choices to funds that allow proven managers to make more of the investment decisions for long-term retirement security.
Funds that buy from all segments and are not restricted from holding cash will keep their employees headed in the right direction. Marc Heilweil (mheilweil@spectrumadvisory.com) is president and CEO of Spectrum Advisory Services Inc. The firm manages approximately $282 million in assets, including the Marathon Value Portfolio mutual fund. Reach him at (770) 393-8725.
