Our investment philosophy is based upon the work of Nobel Prize winning economists Myron Scholes, William Sharpe, Robert Merton, and Eugene Fama as well as world renowned professors Kenneth French of Dartmouth College and Roger Ibbotson of Yale University, who have developed an academic approach to investment management based upon statistical analysis and financial economics rather than Wall Street marketing hype.
We believe that the investment menu for 401(k) retirement plans should be limited to low-cost, low-turnover mutual funds which provide participants with the ability to create a broadly diversified investment portfolio. Actively managed mutual funds should mostly be avoided as the increased costs incurred by plan participants are unlikely to be offset by higher investment returns over the long term.
In the case of stock mutual funds, this would include investment options which provide consistent exposure to the following asset classes: US Large Cap; US Large Cap Value; US Mid Cap; US Mid Cap Value; US Small Cap; US Small Cap Value; US Real Estate Investment Trusts (REITS); International Developed; and Emerging Markets.
In the case of fixed income alternatives, all bond mutual funds should be limited to investment grade securities—no junk bonds should be permitted. Investment options should provide consistent exposure to the following bond asset classes: Money Market Fund or Ultrashort Term Bonds; Short Term Bonds; Intermediate Term Bonds; and Inflation Protected Bonds.
Most importantly, as the vast majority of employees are not financially savvy enough to design their own portfolios, the 401(k) retirement plan should provide professionally designed “one stop shopping” investment alternatives for various levels of risk. To this end, we utilize both Target Retirement Date mutual funds as well as static Model Portfolios providing exposure to the following stock/bond ratios: 50%/50%; 60%/40%; 70%/30%; 80%/20%; and 90%/10%.
We find that mutual funds offered by the Vanguard Group and Dimensional Fund Advisors (DFA) are usually the best investment vehicles to implement this investment philosophy.