Post by Zoinkers on Sept 15, 2006 5:19:00 GMT -5
Morningstar.com
The Best Options in the Biggest 401(k) Plans
Tuesday September 12, 7:00 am ET
By Christopher Davis
Because I'm a Morningstar analyst, my family and friends sometimes ask me to help them make recommendations for their 401(k) plans. As glad as I am to help, I've often been unhappy with what I've seen. Take my stepfather's old 401(k) plan, for instance, which had Fidelity as its provider. Not surprisingly, all of the plan's options were funds run by Fidelity. His choices weren't bad, but there was room for improvement. For example, the plan might have gone with some of Fidelity's strong, blue-chip-oriented funds and shopped around to fill out the rest of the lineup.
Although many employers have increasingly paid closer attention to the quality and diversity of their lineups, giving participants more access to good funds across the industry, many plans still offer funds from just a single fund family.
One way to handle that potentially less-than-ideal situation is to take advantage of your plan's best options--ideally, those with experienced managements, strong long-term records, and reasonable costs. You can then fill in the gaps in your portfolio using other vehicles, including tax-protected retirement investment vehicles like a Roth IRA, or a taxable account. You also might be able to supplement your plan's better investments (or circumvent the plan entirely) if your plan sponsor has made available a self-directed brokerage option that allows you to invest outside the plan in any investment on the 401(k) provider's brokerage platform. Read more about the pros and cons of using self-directed brokerage here.
You can learn more about how to assess the quality of your 401(k) plan yourself here. If you find yourself with a plan with options from a single fund family, you owe it to yourself to feast on the firm's best options and bypass the also-rans. With that in mind, below is a look at some of the strengths and weaknesses at a handful of the largest 401(k) providers.
Fidelity
What to Buy
An industry behemoth, Fidelity boasts an impressive arsenal of talented fund managers and analysts that number into the hundreds. The firm has been bulking up its small-cap analyst staff more recently, but much of its research strength has been in the large-cap realm. Among funds still open to new investors, stalwarts like Dividend Growth (NASDAQ:FDGFX - News), Equity Income (NASDAQ:FEQIX - News), and Blue Chip Growth (NASDAQ:FBGRX - News) are favorites. The strength continues overseas, with standouts such as Fidelity International Discovery (NASDAQ:FIGRX - News). (That fund is closed to new investors, but if the fund was part of your company plan before it closed, you'll likely still be able to buy it.) One caveat: Fidelity's successful funds are no secret and assets have grown at a feverish clip. At Dividend Growth and International Discovery, in particular, we're concerned asset growth will make it difficult for their managers to successfully employ their strategies. The biggest and most popular funds tend to be on Fidelity's 401(k) platform, so there's a good chance you won't be able to buy one of the firm's svelte offerings.
Fidelity's fixed-income offerings are also worthwhile. Low costs, experienced management, and a research-focused, risk-conscious approach have made them standouts. And don't forget the firm's suite of index funds, including Spartan S&P 500 (NASDAQ:FSMKX - News), Spartan Total Market (NASDAQ:FSTMX - News), and Spartan International (NASDAQ:FSIIX - News), which offer broad market exposure at rock-bottom costs (the Spartan funds charge a mere 0.10% per year).
Pass Them By
Fidelity's status as an industry giant has a downside. Thanks to its girth, you'll have a tough time finding many nimble small-cap funds. The firm's small-cap team also has undergone a lot of turmoil lately, leaving funds such as Small Cap Independence (NASDAQ:FDSCX - News) with relatively unseasoned managers. With fewer analytical resources devoted to small caps historically, we're leery of its small-cap offerings. I'd suspect Fidelity's sector-focused select funds don't get a lot of play in 401(k) plans, but most investors should just avoid them altogether. Fidelity has started to do a better job putting sector experts in charge of the funds, but relative newbies generally remain in charge.
State Street Global Advisors
What to Buy
Although State Street Global is a huge 401(k) provider, it doesn't have a big footprint in the retail mutual fund arena. That's because most investors with SSgA-run plans invest through accounts run specifically for institutions, not public mutual funds. But the firm offers respectable options in both arenas. For a no-nonsense 401(k) portfolio, we'd stick with the firm's inexpensive index funds. SSgA's S&P 500 Index (NASDAQ:SVSPX - News) mutual fund is a bargain and probably will be even cheaper if you're accessing through an institutional account. There are also some decent actively managed international offerings in its stable. That's especially the case in emerging markets, where experienced managers, a mild-mannered strategy, and reasonable costs make for an appealing package.
Pass Them By
For the most part, active management doesn't appear to be SSgA's strong suit, especially in the mutual fund area. At its Small Cap (NASDAQ:SVSCX - News) fund, for instance, the managers hew closely to their benchmark in constructing their portfolio, so it hardly stands out. SSgA's active strategies aren't likely to lead to disastrous results, but its low-cost index funds look like a safer bet.
Vanguard
What to Buy
It's hard to go wrong at Vanguard. Founder Jack Bogle's investor-friendly ethos continues to pervade its culture, resulting in ultra-low expenses and a strong, sensible lineup of funds. To be sure, Vanguard is best known for indexing. Its S&P 500 (NASDAQ:VFINX - News), Total Stock Market (NASDAQ:VTSMX - News), Total International (NASDAQ:VGTSX - News), and Bond Market (NASDAQ:VBMFX - News) index funds have core holding written all over them. Its retail index funds are very cheap but still not the cheapest--Fidelity took the lead last year--yet many 401(k) plans provide access to Vanguard's Institutional Index (NASDAQ:VINIX - News) fund, which charges a miniscule 0.05% annually in expenses. Don't give the short shrift to its actively managed funds if they're included in your plan, however. Topnotch choices include Windsor (NASDAQ:VWNDX - News), Windsor II (NASDAQ:VWNFX - News), Wellington (NASDAQ:VWELX - News), and Selected Value (NASDAQ:VASVX - News) on the value side with growth-leaning Vanguard Primecap Core (NASDAQ:VPCCX - News) on the other.
Pass Them By
Unless you bought Explorer (NASDAQ:VEXPX - News) before it closed earlier this year, the small-cap pickings are pretty slim in the Vanguard lineup. The firm doesn't offer an open, actively managed small-cap fund aside from Tax-Managed Small Cap (NASDAQ:VTMSX - News), an unlikely option in a 401(k) plan. (Investors can choose the respectable, if less-than-stellar, Small Cap Index (NASDAQ:VISGX - News) as an alternative.) Given its low costs, REIT Index (NASDAQ:VGSIX - News) isn't a bad way to get real estate exposure, but it hasn't been a standout.
T. Rowe Price
What to Buy
Most T. Rowe Price managers--even the growth skippers--share a valuation-conscious ethic and focus closely on diversification. That mild-mannered approach has led to almost-universal success. T. Rowe's domestic-equity lineup is strong across the board. Its flagship large-cap funds-- Equity Income (NASDAQ:PRFDX - News), Blue Chip Growth (NASDAQ:TRBCX - News), and Growth Stock (NASDAQ:PRGSX - News)--are led by highly experienced investors with terrific long-term records. We're big fans of Mid-Cap Value (NASDAQ:TRMCX - News), Mid-Cap Growth (NASDAQ:RPMGX - News), and Small-Cap (NASDAQ:OTCFX - News) stock, but there's a hitch: Those funds are closed to new investors. (If your employer had a T. Rowe plan before the closure, though, you can very likely continue to buy them.) Small-cap investors have an option in mammoth New Horizons (NASDAQ:PRNHX - News), where seasoned management and steady returns still trump our growing concern over its size. T. Rowe's trademark conservatism makes its sector, regional, and emerging-markets funds more appealing than most other shops'. On the fixed-income front, High Yield (NASDAQ:PRHYX - News) is among the best options in its group.
Pass Them By
Even the least-attractive T. Rowe funds make competent, if less than spectacular, 401(k) choices. New Income (NASDAQ:PRCIX - News) isn't a topnotch option, but it's still an above-average core bond holding. International Stock (NASDAQ:PRITX - News) is improving, though its long-term record remains undistinguished. And with most of its mid- and small-cap strategies closed, new investors will be hard pressed to find good options focused on those areas.
Christopher Davis has a position in the following securities mentioned above: OTCFX
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The Best Options in the Biggest 401(k) Plans
Tuesday September 12, 7:00 am ET
By Christopher Davis
Because I'm a Morningstar analyst, my family and friends sometimes ask me to help them make recommendations for their 401(k) plans. As glad as I am to help, I've often been unhappy with what I've seen. Take my stepfather's old 401(k) plan, for instance, which had Fidelity as its provider. Not surprisingly, all of the plan's options were funds run by Fidelity. His choices weren't bad, but there was room for improvement. For example, the plan might have gone with some of Fidelity's strong, blue-chip-oriented funds and shopped around to fill out the rest of the lineup.
Although many employers have increasingly paid closer attention to the quality and diversity of their lineups, giving participants more access to good funds across the industry, many plans still offer funds from just a single fund family.
One way to handle that potentially less-than-ideal situation is to take advantage of your plan's best options--ideally, those with experienced managements, strong long-term records, and reasonable costs. You can then fill in the gaps in your portfolio using other vehicles, including tax-protected retirement investment vehicles like a Roth IRA, or a taxable account. You also might be able to supplement your plan's better investments (or circumvent the plan entirely) if your plan sponsor has made available a self-directed brokerage option that allows you to invest outside the plan in any investment on the 401(k) provider's brokerage platform. Read more about the pros and cons of using self-directed brokerage here.
You can learn more about how to assess the quality of your 401(k) plan yourself here. If you find yourself with a plan with options from a single fund family, you owe it to yourself to feast on the firm's best options and bypass the also-rans. With that in mind, below is a look at some of the strengths and weaknesses at a handful of the largest 401(k) providers.
Fidelity
What to Buy
An industry behemoth, Fidelity boasts an impressive arsenal of talented fund managers and analysts that number into the hundreds. The firm has been bulking up its small-cap analyst staff more recently, but much of its research strength has been in the large-cap realm. Among funds still open to new investors, stalwarts like Dividend Growth (NASDAQ:FDGFX - News), Equity Income (NASDAQ:FEQIX - News), and Blue Chip Growth (NASDAQ:FBGRX - News) are favorites. The strength continues overseas, with standouts such as Fidelity International Discovery (NASDAQ:FIGRX - News). (That fund is closed to new investors, but if the fund was part of your company plan before it closed, you'll likely still be able to buy it.) One caveat: Fidelity's successful funds are no secret and assets have grown at a feverish clip. At Dividend Growth and International Discovery, in particular, we're concerned asset growth will make it difficult for their managers to successfully employ their strategies. The biggest and most popular funds tend to be on Fidelity's 401(k) platform, so there's a good chance you won't be able to buy one of the firm's svelte offerings.
Fidelity's fixed-income offerings are also worthwhile. Low costs, experienced management, and a research-focused, risk-conscious approach have made them standouts. And don't forget the firm's suite of index funds, including Spartan S&P 500 (NASDAQ:FSMKX - News), Spartan Total Market (NASDAQ:FSTMX - News), and Spartan International (NASDAQ:FSIIX - News), which offer broad market exposure at rock-bottom costs (the Spartan funds charge a mere 0.10% per year).
Pass Them By
Fidelity's status as an industry giant has a downside. Thanks to its girth, you'll have a tough time finding many nimble small-cap funds. The firm's small-cap team also has undergone a lot of turmoil lately, leaving funds such as Small Cap Independence (NASDAQ:FDSCX - News) with relatively unseasoned managers. With fewer analytical resources devoted to small caps historically, we're leery of its small-cap offerings. I'd suspect Fidelity's sector-focused select funds don't get a lot of play in 401(k) plans, but most investors should just avoid them altogether. Fidelity has started to do a better job putting sector experts in charge of the funds, but relative newbies generally remain in charge.
State Street Global Advisors
What to Buy
Although State Street Global is a huge 401(k) provider, it doesn't have a big footprint in the retail mutual fund arena. That's because most investors with SSgA-run plans invest through accounts run specifically for institutions, not public mutual funds. But the firm offers respectable options in both arenas. For a no-nonsense 401(k) portfolio, we'd stick with the firm's inexpensive index funds. SSgA's S&P 500 Index (NASDAQ:SVSPX - News) mutual fund is a bargain and probably will be even cheaper if you're accessing through an institutional account. There are also some decent actively managed international offerings in its stable. That's especially the case in emerging markets, where experienced managers, a mild-mannered strategy, and reasonable costs make for an appealing package.
Pass Them By
For the most part, active management doesn't appear to be SSgA's strong suit, especially in the mutual fund area. At its Small Cap (NASDAQ:SVSCX - News) fund, for instance, the managers hew closely to their benchmark in constructing their portfolio, so it hardly stands out. SSgA's active strategies aren't likely to lead to disastrous results, but its low-cost index funds look like a safer bet.
Vanguard
What to Buy
It's hard to go wrong at Vanguard. Founder Jack Bogle's investor-friendly ethos continues to pervade its culture, resulting in ultra-low expenses and a strong, sensible lineup of funds. To be sure, Vanguard is best known for indexing. Its S&P 500 (NASDAQ:VFINX - News), Total Stock Market (NASDAQ:VTSMX - News), Total International (NASDAQ:VGTSX - News), and Bond Market (NASDAQ:VBMFX - News) index funds have core holding written all over them. Its retail index funds are very cheap but still not the cheapest--Fidelity took the lead last year--yet many 401(k) plans provide access to Vanguard's Institutional Index (NASDAQ:VINIX - News) fund, which charges a miniscule 0.05% annually in expenses. Don't give the short shrift to its actively managed funds if they're included in your plan, however. Topnotch choices include Windsor (NASDAQ:VWNDX - News), Windsor II (NASDAQ:VWNFX - News), Wellington (NASDAQ:VWELX - News), and Selected Value (NASDAQ:VASVX - News) on the value side with growth-leaning Vanguard Primecap Core (NASDAQ:VPCCX - News) on the other.
Pass Them By
Unless you bought Explorer (NASDAQ:VEXPX - News) before it closed earlier this year, the small-cap pickings are pretty slim in the Vanguard lineup. The firm doesn't offer an open, actively managed small-cap fund aside from Tax-Managed Small Cap (NASDAQ:VTMSX - News), an unlikely option in a 401(k) plan. (Investors can choose the respectable, if less-than-stellar, Small Cap Index (NASDAQ:VISGX - News) as an alternative.) Given its low costs, REIT Index (NASDAQ:VGSIX - News) isn't a bad way to get real estate exposure, but it hasn't been a standout.
T. Rowe Price
What to Buy
Most T. Rowe Price managers--even the growth skippers--share a valuation-conscious ethic and focus closely on diversification. That mild-mannered approach has led to almost-universal success. T. Rowe's domestic-equity lineup is strong across the board. Its flagship large-cap funds-- Equity Income (NASDAQ:PRFDX - News), Blue Chip Growth (NASDAQ:TRBCX - News), and Growth Stock (NASDAQ:PRGSX - News)--are led by highly experienced investors with terrific long-term records. We're big fans of Mid-Cap Value (NASDAQ:TRMCX - News), Mid-Cap Growth (NASDAQ:RPMGX - News), and Small-Cap (NASDAQ:OTCFX - News) stock, but there's a hitch: Those funds are closed to new investors. (If your employer had a T. Rowe plan before the closure, though, you can very likely continue to buy them.) Small-cap investors have an option in mammoth New Horizons (NASDAQ:PRNHX - News), where seasoned management and steady returns still trump our growing concern over its size. T. Rowe's trademark conservatism makes its sector, regional, and emerging-markets funds more appealing than most other shops'. On the fixed-income front, High Yield (NASDAQ:PRHYX - News) is among the best options in its group.
Pass Them By
Even the least-attractive T. Rowe funds make competent, if less than spectacular, 401(k) choices. New Income (NASDAQ:PRCIX - News) isn't a topnotch option, but it's still an above-average core bond holding. International Stock (NASDAQ:PRITX - News) is improving, though its long-term record remains undistinguished. And with most of its mid- and small-cap strategies closed, new investors will be hard pressed to find good options focused on those areas.
Christopher Davis has a position in the following securities mentioned above: OTCFX
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