One major obstacle to investing for income for many ordinary people who don't make megabucks is the choices given them by their 401(k) or other job-offered retirement plan.
I faced the same problem while still employed as a federal bureaucrat. I was given a choice of some broad index funds, but only the money market equivalent and the bond funds generated income.
401(k) Plan Administrators Are Finally Waking Up and Smelling the Coffee
The human resources consulting company Hewitt Associates recently conducted a survey of employers found that 74% were making efforts to reduce account expenses. 51% were moving to lower cost options. Specifically, they were replacing high-cost mutual funds charging a retail level of expenses with lower cost funds and even equivalent index funds.
Keeping expenses as low as possible has always been an integral part of my income investing program, and I have had no enthusiasm for mutual funds after I discovered how many hidden fees and costs come with them.
Expenses Often Determine Fund Performance
Recently, however, I've been reading COMMON SENSE ON MUTUAL FUNDS (the Fully Updated 10th Anniversary Edition) by John Bogle. He documents in great detail that the expense level of a fund -- ANY fund! -- is almost a precise determinant of its future return (in relation to other funds of the same type).
He lays out the evidence chart by chart, page by page. Over the years, the mutual funds with the highest expenses do worse than the mutual funds with the lowest expenses.
It's not a 100 direct relationship, of course, but there's a very high correlation. In many cases, funds that lag their overall sector do so by a margin very close to their expenses.
Choose Index Funds When They're Available
That's a good argument for index funds, because they should (as he points out -- with evident dismay-- not all of them do) have the lowest expenses. They have to maintain basic records, buy and sell securities only when the index changes (rarely) and hire customer service reps to answer the 800 number, and that's about it.
By the way, understand that Bogle found no evidence for the familiar evidence that some mutual funds are justified in charging higher expenses due to their performance. Funds with higher expense ratios underperformed low-expense funds.
It's good to see that companies are finally coming to understand this basic information, and making an effort to help their employees. And, I suspect, protect themselves from lawsuits from retired employees disgruntled by their final account balances.
It could also be that, since companies executives are covered by the same 401)k) plans, that they want better options for their own retirement portfolios.
Exchange Traded Funds Remain My Preference
I don't know if any laws prevent employers from offering exchange traded funds through 401(k) plans. I don't know why they don't. I know that many companies allow employees to put their retirement funds into their employer's own stock. If they can buy stock in one company, then why not stock in other companies or ETF shares, which are bought and sold the same as individual shares of stock.
It just occurred to me that companies can provide employees shares of their own stock without a broker, but they'd need a broker for any other securities. Yet they've been letting advisers offer mutual funds with front end loads, which is a lot more money than commissions, so it should be possible.
If you can pick and choose between individual securities, buy up exchange traded funds of income producing securities. If that's not possible, go with a combination of a S&P 500 and Lehman Brothers Total Bond index funds. Then you'll have to do your investing for income in a taxable brokerage account.
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