Don't look now, but your favorite 401(k) mutual fund may be going the way of the VHS tape.
In a drive to cut costs, 401(k) plans are replacing familiar mutual-fund investment options with more-obscure vehicles known as “collective investment funds.”
Just like mutual funds, collective funds pool investors' assets and invest in stocks, bonds and other securities. The chief difference: Collective funds are typically available only in retirement plans. Because they aren't sold directly to the public, they generally aren't regulated by the Securities and Exchange Commission.
Collective funds tend to be substantially cheaper than mutual funds, largely because they don't have to comply with SEC regulations or market to retail customers. That's driving 401(k) plans to embrace these products, which are offered by big fund providers like Fidelity Investments, Vanguard Group and Charles Schwab Corp. as well as by banks and trust companies.
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Only 58 percent of large defined-contribution plans such as 401(k)s used retail mutual funds in 2007, down from 65 percent in 2003, according to research and consulting firm Greenwich Associates. By contrast, 39 percent of such plans used collective funds last year, up from 33 percent two years earlier. Other common 401(k) investment options include institutional-class mutual funds sold to retirement plans and other large investors, and “separate accounts,” which are custom-designed for a single retirement plan.
Since fees eat into returns, lower-cost investment options can mean a bigger nest egg for 401(k) plan participants. But these funds can also have substantial drawbacks. They're not listed in the newspaper or on financial-news Web sites, and they often offer far less information on their performance and holdings than mutual funds. Collective funds aren't required to send out prospectuses, and some value their holdings and update performance only monthly or quarterly.
Some investors aren't eager to leave behind mutual funds for the unfamiliar world of collective funds as their company makes the switch. Bob Kennedy, 57, is one of them. A salesman for AT&T Inc. in Minnesota, he happily invested his 401(k) assets in brand-name mutual funds for years.
But in recent months, AT&T revamped its 401(k) investment options for many employees, removing mutual funds from the core lineup but offering a “brokerage window” that lets workers invest as much as half their vested balance in mutual funds and stocks. The core investment options are now a company-stock fund and collective funds with names like AT&T Total Return Bond Fund and AT&T U.S. Stock Fund.
Kennedy says he “did quite well” in the traditional mutual funds, and “I was sad to see them go.” What's more, he has found the information on the new collective funds a bit sparse. “You have to take a leap of faith,” he says. He was thinking of retiring next year, but much depends on how his portfolio performs. “I wish they would have left (the plan) alone for a while,” he says.
AT&T spokesman Rolf Gatlin says the shift to collective funds gives participants “access to institutional-quality money management at a low cost.”