Personal Finance Worthwhile? The most widely held funds in investors' 401(k)s

By David Pitt

AP Personal Finance Writer

NEW YORK (AP) -- As the year comes to a close it's time to take a look at what's in your 401(k). It's important to consider whether you should make some changes that may boost results or better reflect your tolerance for market risk.

It hasn't been a disastrous year for the 10 most commonly held mutual funds in 401(k) plans. But many underperformed the Standard and Poor's 500 stock index, which has risen 9.29 percent year-to-date through Monday. It's one sign that the biggest funds aren't always the best performers.

The top 10 list compiled by retirement plan rating company Brightscope Inc. consists of the funds that attract the most investor cash. Brightscope monitors 50,000 plans, which represents about 90 percent of the assets held in 401(k) plans.

The funds on the list are among the most frequently offered by employers constructing 401(k) plans. And the mix of names isn't really surprising: There are three Fidelity funds, two Vanguard funds, two American Funds options and a Pimco bond fund.

With the exception of the one bond fund, they're all large-cap stock funds, typically the most popular choice among 401(k) investors.

It's important to consider that 401(k) plans often don't respond quickly to changes, so funds that underperform could remain in your plan for a long time, said Mike Alfred, CEO of Brightscope.

"Just because a fund is offered in your plan, doesn't mean it's a good fund for you," he said. "You should do your own due diligence."

"There are some of these funds that maybe should carry a warning label about their ability to continue in the future," said Dan Culloton, a Morningstar Inc. fund analyst. That's because funds that get too large often can reach a point at which they're no longer nimble enough to maintain their historic gains.

The top two funds -- Pimco Total Return and Growth Fund of America -- have become very large over the last decade.

The Pimco fund, for example, manages a total of $255.9 billion, which includes assets from 401(k) investors, individuals and pension funds.

They've done very well relative to their categories and benchmarks and have attracted massive inflows.

But, the Pimco fund has become so large it's difficult to make a difference with individual bond selections, Culloton said. "Buying a few more corporates just doesn't move the needle on something that large anymore."

Growth Fund of America has seen investors pulling out cash in the last couple of years.

The size of a fund should be one of many factors considered by investors when putting together their 401(k) portfolio. Culloton advises to consider it along with the fund's strategy, how often it trades, and whether it trades with the crowd or has a contrarian approach. In addition, consider the long-term track record and its management experience.

Cost is another factor to be considered and most of the funds on the list have relatively low expense ratios. The Vanguard Institutional Index, eighth on the list, is the lowest priced S&P 500 index fund available, Culloton said.

Some funds may have a low expense ratio and have underperformed for a year or two, but if you have confidence in the manager's ability to pull it back up, it may be worth staying in, said Brightscope's Alfred. If the fund's expense ratio is significantly more than a comparable index fund, you probably should get out.

If you have any of these funds in your portfolio, take a look at the performance, consider its size and the other measures to see if it still a fit for your investment goals. If they're an option in your plan, you may also want to decide if it's time to get in.

For Alfred the value of reviewing the top funds is that it gives an investor an opportunity to consider whether they want to stick with the millions of other investors and stay in the large funds or develop a different strategy.

"If you are on this list, pat yourself on the back. You probably did better than a lot of other people in the last 10, 15 or 20 years if you held those funds for that long," said Alfred. "The real question is, should you be there now?"

Published: Fri, Nov 19, 2010

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