Financial Opinion and Insights

Individual Investors Need Help!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

According to a recent paper by Vanguard, most individual investors still don’t do very well when it comes to selecting mutual funds.    For those of you who really like  to get `deep in the weeds’ on this stuff, you can read it here

This is an issue affecting many company retirement plan participants who have plans offering a long list of mutual fund selections.

Many plan sponsors – mistakenly, I think – believe that if they offer a huge menu of funds and turn all decision-making over to their participants, they’re `off the hook’ for the participants’ investment decisions.

Not sure that’s so.  I’m no attorney – if you’re a plan sponsor, you may want to discuss this with your ERISA attorney – but it seems to me that plan fiduciary’s first and only consideration should be to act in the best interest of plan participants.

DALBAR Financial Services tracked investor’s behavior chasing market returns from 1987-2006[i].  During that 20-year period, the S&P 500 yielded an average annual return of 11.8% while the average investor realized only 4.3%, clearly demonstrating that the vast majority of plan participants lack the knowledge, skill, and discipline to make good investment decisions.

So why do most plan sponsors simply offer a menu of high-priced retail stand-alone mutual funds – or worse, a bundled package assembled by a `big name’ company selling a high (hidden) priced product – instead of seeking out professional investment management solutions?  My guess is it’s simply a matter of a long history of drilled-in programming.   Let’s face it, many plan sponsors have been sold a `bill of goods’, some even believing their plan is `free’; but, asking participants to assemble investment portfolios is like asking them to assemble all the parts of an automobile and expecting them to reach their destination!

The Vanguard paper and the DALBAR study are just two in a long list that reach the same conclusions.  Plan sponsors need to ask themselves:  Are their participants really better off self-managing their retirement assets?  Should we really be asking them to do something they’ve never been educated to do?   – Let’s face it, many truly believe they know what they’re doing, but often their only education was a weekend class learning a trading system – or they read consumer magazines

Prudent plan sponsors – `prudent’ does have a legal definition in ERISA – who truly understand their duty is to act “solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries” may want to consult with a plan consultant about their options.



Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and an Accredited Investment Fiduciary® now in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

[i] DALBAR, Quantitative Analysis of Investor Behavior, 2007