Stocks in 401(k) Plans? Why Not?

A recent article at the Wall Street Journal’s smartmoney.com explains why mutual funds

still charge fees, despite the fact that the transaction costs for stocks, bonds and exchange-traded funds (ETFs) are getting cheaper. According to an industry spokesperson, customers are paying for a service they are not receiving from other investments, namely fund managers trying to get the best rate of return possible for their investors. But for most actively managed funds, no matter how poorly they perform, fees aren’t cheap. It makes me wonder a couple of things: first, could I do a better job than fund managers, and second, why shouldn’t 401(k) plans offer the option of employees to buy whatever stocks they choose that are available on the New York Stock Exchange? I am not suggesting that an employee’s company stock be the only option; we saw what happened in the 1990s. (Remember Enron.)

But perhaps the average person could do better. Say, for example, that we played a game reminiscent of “pin the tail on the donkey,” where a blindfolded me attempts to pick stocks from the WSJ’s biggest page C5 (referring to today’s edition) posted on the wall. If I picked 10 of them and checked back a year later, would I have done better than a fund manager? Maybe not. But even if I failed I would not be paying an exuberant amount to do so. If I had purchased ten stocks through an online brokerage without the bells and whistles, I would have likely paid no more than $70 to $100 total in transaction costs regardless of the amount I invested. There would be no additional costs until I sold the stocks. Of course, the idea of anybody actually managing their own 401(k) plan mortifies anybody sitting on the House Education and Labor Committee. After all, isn’t the problem with investing is that too many employees are left on their own, having to make frightful and potentially financially fatal decisions? No,

I think the problem is the opposite: too many decisions about investing are left in the hands of others…whether it is policymakers, employers or fund managers.

A few blogs ago, I commented on the new Department of Labor disclosure rules regarding 401(k) fees. Bottom line is they should be easy to read and understand, not like a three-foot long phone bill, and should explicitly state the rate of return on a fund after fees are calculated. If more disclosure eventually forces fees down, fine. But employees need more than just additional disclosure of mutual fund fees. They need more options would force fund managers to compete with the likes of cheap and efficient online brokerage services.

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