5 Steps You Need To Pick The Right Index Fund In Your Retirement Plan

Don’t know what fund your 401k/403b is investing in?

Didn’t know your 401k/403b was investing in a fund at all?

Don’t worry. You are not alone.

Fees could be eating away at your earnings and if left unchecked could cost you hundreds of thousands (if not millions!) of dollars over your lifetime.

For example: Let’s say two people each put $10,000 a year into their 401ks starting at the age of 20. Both pick a fund that tracks the same market, but with different fees: Person A picks an index fund with 1% management fees, and Person B picks a similar index fund with .04% management fees.

Here is how much money both people will have at the age of 60 given an 8% return:

Person A will have $2,137,804

Person B will have $2,769,705

That is a difference of $630,000!

Here is how people miss out on all that money:

People tend to put money into their employer’s default retirement fund (which is typically a high-fee target date fund) as they are overwhelmed by the list of options and are intimidated to the point of inaction. Some don’t even realize they have the option of choosing the funds that their retirement savings goes in at all.

Also, sometimes people think that these high fee funds are doing something fancy that they cannot do on their own, but in reality, these high fees just take money out of your pocket to pay someone else’s salary.

If you want to learn more, I cover this in Build Your FIRE’s free online course that you can sign up for here.

What I am going to do is break down, step by step, how to find a low-cost index fund that mirrors the gold standard of buy and hold index investing: The S&P 500 or the Vanguard Total Stock Market Index Fund. Most employer plans should have one of these along with a fund that follows Vanguard’s Total Bond Index Fund.

Since there are thousands of different index funds out there, I’m only going to be able to get you in the ballpark. The final decision rests with you. Make sure that you read up on any fund on your own before allocating your funds there.

Here we go:

  1. Find your 401k/403b fund options
    You can typically find the options for what funds your 401k/403b can be invested in from your HR team.
  2. Look for Vanguard index funds in your options
    If you have VTSAX (US stocks), VBTLX (US bonds) or Vanguard Target Date Retirement Funds and know what asset allocation you want (we talk about how to determine asset allocations in our free course you can join here), you’re done! These are my favorite funds because of their extremely low fees (as low as .04%!) and broad-based coverage of economies. Simply input your desired asset allocation into the appropriate funds.
  3. No Vanguard options? Look for the “Large Cap” funds
    Typically funds on your menu will be divided into sections according to the type of fund. You are going to go straight to the Large Cap section.Large Cap (sometimes called “Big Cap”) is short for “Large Market Capitalization” and is used to refer to companies that have around, or more than, $10 billion dollars worth of shares available on the market.
  4. Look for S&P 500 and Total Market US Funds in the Large Cap funds section
    Now, remember, there are a ton of funds out there with different names. Make sure you research all of those available to you. This guide is only here to point you in the right direction.You are looking for the funds below or ones that are similar. Before picking your fund, use your favorite search engine or Morningstar.com to find the descriptions of each below by typing in the ticker symbol (acronym for the fund).Get familiar with these funds in order to learn what you are looking for when you research the what is available to you. These are also great options if you have access to them:
  • Schwab Total Stock Market Index – SWTSX
  • Fidelity Total Market Index Investor – FSTMX
  • SSgA S&P 500 Index N – SVSPX
  • T. Rowe Price Equity Index 500 Fund – PREIXYou’ll notice that all of the funds in this example list are below a .21% management fee. You want to keep fees as low as possible, but what is possible for you depends on your options.For instance: For years I was invested in State Street Equity 500 Index R (SSFRX) which is an S&P 500 fund at a .66% fee. I consider this very high, but it was the best fund available for me at the time.Weigh your options and once you find your fund, either allocate 100 percent to that fund if that is what you want or follow this same process to find a total market bond fund and divide your allocations appropriately.
  1. If you are still unsure, ask your HR department for help
    Sometimes companies will provide a meeting with a fiduciary advisor or your retirement plan provider free of charge.Typically you can describe to them what you are looking for and they can help you settle on one or more funds. Make sure to ask them if they are “fiduciaries in all capacities” before continuing the meeting. When someone is a fiduciary that means that they are legally obligated to have your best interest in mind, not their company or a specific product.If all of your funds are high-fee there is no harm in politely complaining to your HR department to see if there are other options that they aren’t showing.

Do you have any stories about your employer’s plan or questions? Tell us in the comment section below.

Share BYF

2 thoughts on “5 Steps You Need To Pick The Right Index Fund In Your Retirement Plan

  1. Understanding investment fees is something that really opened my mind! I first started out in an investment with a 1.18% expense ratio. I thought this was really good! Then I learned about ETF’s and transferred my IRA to an investment with a 0.60% ratio. I thought that was good! Now I’m considering switching over to Vanguard VTSAX with an expense ratio of 0.04%. I know that’s good! Thanks for sharing!

    1. That was the same journey took! Once you see the math on long-term investments it begins to look outrageous. In my last job, I joined the fiduciary committee just to get those fees down for everyone! Only had funds with >.66% fees. I was offended!

Leave a Reply

Your email address will not be published. Required fields are marked *