401(k), Fiduciary

Why index funds may be better for the 401(k)?

It’s not about the mountain of performance research against active funds. It comes down to one term that gets to the heart of 401k plans: reasonableness. Plan sponsors can easily be held liable if a group of participants develops a case in which it can show their investment fund offerings have fees that are not “reasonable.” In other words, can the costs be justified by the performance? The real question is what are the benefits of index funds from a fiduciary standpoint. The bottom line, utilizing index funds is a prudent decision when it comes to fees, investments, and asset allocation. It’s a prudent decision both at the individual and aggregate plan level. Index fund performance closely matches the realized and expected performance of the underlying index it represents. The same underlying index which in many cases is tied directly to an asset class that is used in the asset allocation approach and process. The idea of traditional active management is very subjective on many different levels so it makes any evaluation process fraught with risk(s), variability, and debate. It’s not easily defensible. The focus should be on the asset allocation process and the index fund is a natural and reasonable extension of that process.