No doubt you have seen the news recently about the stock market gyrations caused by the uncertainties arising from Covid-19. Because many Americans’ retirement savings are invested directly and indirectly in the stock market, now may be the time to evaluate how your 401(k) is holding up through this market volatility.
Foremost, a fund that has lost value in this down market does not make it a bad investment any more than a fund that made money in a up market is a good investment. When evaluating performance, how the fund performed compared to the overall market it invests in, also known as a benchmark, is one of the most important facts to consider.
As a participant in a 401(k) it is a good idea to know which benchmark your employer has selected for the funds you own. Because there are thousands of funds that invest across a broad spectrum of companies, there is no single, one-size-fits-all benchmark. To the general public, the Dow Jones Industrial Average is the most commonly recognized benchmark, although it is seldom used anymore by professional investors. For funds that invest in large companies, the Dow Jones Index has been replaced by more representative benchmarks, such as the S&P 500 Index and the Russell 1000 Index. For funds that invest in small companies, the Russell 2000 Index is a commonly used benchmark. For funds that invest globally, Morgan Stanley’s EAFE Index (Europe, Asia and Far East) is one of the more popular benchmarks.
The Employee Retirement Income Security Act (ERISA) requires your employer to furnish you with a list of all the funds in your 401(k) plan along with the investment performance of each fund and the investment performance of the fund’s benchmark. For most plans, this information is readily available on the plan’s website. This information allows you to see and compare investment performance and better judge how your fund investments are performing relative to the market.
For example, your large company stock fund that lost 10% of its value might not seem so bad if at the same time the S&P 500 Index lost 12% of its value. Conversely, the same fund that gains 10% might not seem so rosy if at the same time the S&P 500 gains 12%. Even worse is the same fund that loses 2% of its value at the same time the S&P 500 is up 2%. Over time, funds that do not keep pace with their benchmarks can cost you tens, even hundreds, of thousands of dollars in lost retirement savings.
ERISA imposes on your employer a duty to select good investments, monitor those investments and remove those that are imprudent. Your employer may be failing its duty if the plan retains funds that underperform their benchmarks year after year. 401(k) mismanagement is a serious matter that may result in you having to work longer to make up lost savings. With the recent volatility in the market, now may be the time to take stock of your retirement savings. Read your plan documents and know your rights.
If you have questions or concerns about you 401(k), Sanford Heisler Sharp has a number of employment lawyers in San Diego, New York and Washington, D.C. who can help you assess your 401(k) plan and explain your legal rights as a plan participant.