Does the University of Southern California (USC) have any Underperforming Mutual Funds in their Retirement Plan?
As usual I would like to first explain that all the information, I am mentioning is public information on the department of labor website. These forms are filed annually by companies with retirement plans. It is all public record. You can find any form 5500 filing of any company here. In these forms you can see various details of any company’s plan from investment menu to current assets. I imagine these are public so that there is transparency and fairness to employees. The fact that anyone in the world can download and send this information anywhere; implies that there should be no liability speaking opinions on a company’s plan. Unfortunately, companies still might mistake this as an offensive article so let me say it anyway. Anything I say about any company and its retirement plan is simply my opinion. I do not mean to damage or expose any corporation. I am simply addressing fixable improvements of the mentioned company’s investment menu. If anything, this should be an opportunity for companies to use this information as a resource. I mean heck, imagine a company read this and improved their 401k plan immediately. That would be great PR and show great leadership on their part. Please be advised that companies file form 5500’s for the prior year reported. Just like tax returns, we can only see information from the last filing the company submitted. So, there is a chance the investment menu we are looking at could be over a year old. However, the reason I cover the investment menu to begin with is because 99.999% of the time companies never change it. The investment menu typically stays the same because the plan provider has them sold on their own proprietary mutual funds. If they don’t know its broke, then they won’t fix it. Let us begin.
USC’s Investment Menu
So, I want to first off explain that this is just part of USC’s investment menu. If I counted correctly on their form 5500, there is about 104 investment options. As a plan sponsor it is always important to see if there are better investment alternatives for a specific mutual fund’s investment goal. In this case I will choose the most popular fixable fund. That will be the Fidelity Contra fund. If you don’t know already, the Fidelity Contra fund is a proprietary mutual fund fidelity offers that is like the Vanguard Growth Index fund. It invests in growth type stocks. The difference between the two is the expense ratio. I am going to assume it is the Fidelity Contra Fund Class K with an expense ratio of .74% because that is lower than the .81%, I found on fidelity’s website. So, if the Fidelity Contra Fund $FCNKX and the Vanguard Growth Index Fund $VUG are the same thing (correlation .95), can we compare their performances along one another? Sure, we can! Simply use google!
So, you can see in both the 5-year chart and the max chart, $VUG has outperformed the Contra Fund. This is what I mean when I say you got to consider the differences in fees over time for the participants. Both funds invest in the same things however one costs $7.40 cents for every $1000 dollars invested and the Vanguard costs $ .40 cents for every $1000 dollars invested. Even if we find out the Contra Fund has a lower than reported expense ratio, we know it will never beat .04%. When it costs you less to own the same fund, you are able to buy more shares of that fund. More shares mean more returns in the long run. Check out the max chart. Even in a down market, if you were a participant in this particular Contra Fund since 2008, you would only be up 93% in total, whereas with the Vanguard alternative you would have been up 351%! That is a big difference to ignore. Do you think participants would be frustrated to know that their current assets would have been at least two times higher if they were in the better performing Vanguard alternative? Probably.
Technology has changed a lot. We can now see all the inefficiencies in large retirement plans with public filings from the Department of Labor. I choose to use it for good and point out the added value I can bring in hopes of being hired haha. Whereas ERISA lawyers use it to prosecute the plan sponsor. Either way, changes are happening. We can see consistently there is new litigations every day about what they consider is an ERISA breach. If I happen to get lucky and stumble upon a USC decision maker reading this, just know it is not your fault the menu is like this. It is just the way the retirement industry is systematically designed. Plan providers engrave early on that the investment menu they give you should not be questioned. To them exercised prudence is very subjective. By the way get this, if we were to replace the Contra Fund with the Vanguard Growth Index fund right now, participants in total would save in fees 30 million dollars over a 10-year period. That’s 3 million a year!
Sammy Khalil is a 401k Fiduciary from Nyx Moros, a firm which advises on Company 401k plans. Sammy conducts full analysis by benchmarking retirement plans holistically. This ensures the entire plan is in the plan sponsor's best interest. Being independent means, I can be transparent in all advice. For more information, please visit www.nyxmoros.com. Or message me on LinkedIn. Whatever is easier for you! 😊