PSI Newsletter and Website Header 10.2.15
By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Recently Dalbar reported that the average equity mutual fund investor experienced returns of 5.5% in 2014 compared to the S&P 500 Index return of 13.69% — more than 8% less. Dalbar also reported that the average fixed income mutual fund investor received a return of 1.16% in 2014 while the Barclay’s U.S. Aggregate Bond Index returned 5.97%. In terms of magnitude, this is even worse as fixed income mutual fund investors received more than 5 times less in returns than the index.

Is this an example of active management underperforming passive, or is there something else at work? The folks at Dalbar conclude that the performance differences, because they are so large, are attributable to bad investor decision-making. Unfortunately, Dalbar’s studies show that 2014’s mutual fund investor performance is not a one-time event. The average mutual fund investor typically underperforms the indexes each year by a wide margin. What can 401k plan participants (who comprise the majority of mutual fund investors) do to keep from sabotaging their 401k returns? Plan participants should:

Never, ever try to time the markets

Market timing involves making buy or sell decisions based upon a prediction of future market movements. For example, assume that war appears imminent in the Middle East and a plan participant hears on the news that the price of oil may rise. Recalling that his 401k plan offers a mutual fund that invests in commodities, a participant decides to transfer all of his account balance into that fund. Two days later the rumors of war appear to be unfounded, and the price of oil and the commodities fund, crash.

Never trade a 401k plan account

Some plan participants view their 401k plan account as a trading account that they can build in size by executing various trading strategies. Trading a 401k plan account is not a sound wealth building strategy. Unless a participant has significant trading expertise, can hire an expert or can afford to lose all of his/her retirement savings, there are much better approaches to building a retirement plan nest egg.

Ignore the newsletters and their co-workers

There are a number of very large 401k plans that have current or former employees who issue buy/sell recommendations on the investment options in these large plans. Participants should ignore them. Unless a participant can execute all of their recommendations exactly when issued, they will never be able to replicate their performance.

Never buy or sell a mutual fund for emotional reasons

Participants that are rattled by the markets and think they will lose everything each time the markets fall should get help from a qualified investment advisor. They shouldn’t make trades in their 401k plan accounts without professional guidance. What they will pay in advisor fees is far less than what they will lose by making bad trades.

Plan sponsors should consider including these tips on participant investment decision-making in their next employee education session.

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About the Author
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.