Mutual Funds
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Financial powerhouse funds a flimsy 401(k)
Dow Jones, the nation's foremost financial publisher, runs a retirement plan with a good employer match but an all-too-common problem: lackluster fund choices.
By Timothy Middleton
The Wall Street Journal is a great newspaper, but its publisher's 401(k) plan is probably no better than yours. In fact, yours could be eerily similar.
The Dow Jones & Co. plan is administered by the retirement arm of Fidelity Investments, the nation's No. 1 provider of 401(k) plans, with assets of $2.1 trillion. Thus it's likely that hordes of other corporate plans are just as pedestrian as this one.
If the editors of that famous front page examined their own plan as skeptically as they do the innards of companies they cover, they'd bury their report deep inside. Only 11 of the plan's 28 investment options are above average. Only a handful have really low expenses.
As remarkable as the mediocrity of the plan's investment options is the lack of specialized portfolios essential to building a well-rounded nest egg. Funds that invest in foreign bonds, emerging-markets stocks and debt, and domestic junk bonds -- every category a top performer in recent years -- are absent.
"It was striking to me when I first got access to the plan that, a) everything was from one fund company and, b) there were a lot of options that simply weren't there," says Theo Francis, a Wall Street Journal reporter.
Three of the options are not managed by Fidelity Investments -- and they're among the best. The others are managed by Fidelity, and their returns are more sigh than high.
Dow Jones declined to release information about the plan, which has 8,000 participants and assets, at last report, of $866 million. Later, however, it agreed to confirm a few basic facts. Fidelity also declined to comment, citing client privacy.
Closely guarded secrets
Indeed, while the 401(k) has become the principal retirement tool for America's work force, employers treat information about their plans like state secrets. That makes it difficult for employees to examine their plans thoroughly, especially their costs, and virtually impossible to compare them with others.
MSN Money intends to throw more and more light on this subject. So this is a broadening of our investigation of America's 401(k) system.
Fortunately, public employers are compelled to file annual reports on their plans with the Securities and Exchange Commission, and Dow Jones' report for 2003, the latest available, was examined. These filings can have huge gaps, however. So current and former employees have helped me fill in the blanks. (Full disclosure: I am a former Dow Jones employee, though I left the company before its 401(k) was created.)
The plan's strongest element is the employer match, which is 3% of pay even if workers don't contribute and as much as 2% more if they do. The company also contributes 7% of pay for all eligible employees in a companion retirement plan. And there's a supplemental bonus in the retirement plan for highly compensated workers.
But the 401(k) money is sluicing through an expensive and not-very-attractive array of me-too investments. Dow Jones' plan looks like a baseball team with too few starting pitchers, bench players in the other positions and a slugger who ran out of steroids.
Why buying company stock ain't worth it
Like many public corporations, Dow Jones offers the option to invest in the company's own stock. (Fidelity manages this portfolio, also.) And as with many public corporations, that has been a miserable choice.
When you invest in your own company's stock, your nest egg and your pay are in the same envelope. If your company blows up, like Enron, or just blows off, like AT&T, you are doubly damned.
Dow Jones' stock is particularly dismal: It's been flat for 20 years. If you had invested $10,000 in the company's shares on March 9, 2000, it would be worth roughly $6,500 now, a loss of 35%.
A lot of plain-vanilla funds
Wall Street Journal reporters obviously know this. Only $3.2 million of the plan's assets were invested in company stock at the end of 2003. They might be better off than you: A survey by plan consultants Hewitt Associates found that when plans include company stock, it accounts for an average of 41% of their assets.
More about 401(k)s
The other equity options are 14 mutual funds, all but three from Fidelity. Among the Fidelity offerings are three of its Spartan index funds, whose expense ratios of 0.1% are believed to be below the company's cost. (I wrote about Fidelity's Spartan funds in "Top funds at fire-sale prices.")
Francis, who now covers insurance for the paper, used to cover mutual funds and knows how much costs matter. "I'm an indexer," he says.
Six of the equity funds are simply different flavors of domestic big-caps, such as Fidelity Magellan (FMAGX) and Fidelity Dividend Growth (FDGFX). And aside from Fidelity Spartan U.S. Equity Index (FUSEX), they are much more expensive.
Magellan, that failed slugger, hasn't ranked higher than the bottom quarter of similar funds for 10 years. Its expense ratio of 0.7% is well below the industry average. But to be frank, that's a lot more than it's worth.
Dodge & Cox Stock (DODGX), a vastly better performer, charges 0.54%. While Dodge & Cox, like Magellan, is closed to new retail investors, it is available in 401(k) plans. Both funds are huge and enjoy economies of scale that one fund shares with investors -- and the other does not.
Other equity options include Vanguard REIT Index (VGSLX), Fidelity's Four-in-One Index Fund (FFNOX), an asset-allocation fund, and managed portfolios from Fidelity (small, mid-cap and foreign) and Pimco NFJ (small-cap).
There are eight balanced offerings, five of them life-cycle funds in the Fidelity Freedom series, with maturities every decade from 2000 through 2040. The fixed-income options include a money market, a Vanguard bond fund, two Fidelity bond funds and a stable-value fund.
Only three of the portfolios sport Morningstar's top rating of five stars. One is Fidelity Diversified International Fund (FDIVX), a superb and timely offering. The other two are Pimco NFJ Small Cap Value (PSVIX) and Vanguard Inflation-Protected Securities (VIPSX).
Too many others are simply journeyman portfolios like Fidelity Intermediate Bond (FTHRX), which over the last five years has trailed the Lehman Brothers U.S. Aggregate Bond Index by 0.69%, almost precisely its 0.61% expense ratio. (Index alert: The plan also offers the Fidelity U.S. Bond Index (FBIDX), a much better choice because its expense ratio is only 0.32%. It has matched the Lehman Aggregate over the last five years.)
Another lackluster choice is Fidelity Blue Chip Growth (FBGRX). This is a near-clone of the S&P 500 Index ($INX) that nevertheless has underperformed the benchmark in eight of the last 10 years.
On the surface, therefore, 28 investment options would appear to be generous. The average big-company plan has only half as many, according to Hewitt. But more doesn't mean better, and there are signs Dow Jones' employees are underwhelmed by their choices. In 2003, employee contributions to the plan were $18.7 million, little more than the employer contribution of $16.4 million.
So despite tax incentives that would allow these presumably savvy investors to contribute considerably more than the company matches, it appears Dow Jones workers in the aggregate do not.
You pay for mediocrity
Dow Jones' report for 2003 says the plan paid $39,810 in administrative expenses. This modest sum, which wouldn't pay for a single voice at the end of an 800 number, under-represents the actual cost.
A Dow Jones spokesman confirmed in an e-mail, "It is so that Fidelity derives most of its fees through charges to investors for management of its funds." That is, employees themselves are paying this corporate pension expense.
There's no way to gauge what these real costs are -- experts I contacted offered guesses that ranged between $70,000 and $375,000. But whatever they are, they're too much. When a near-$1 billion 401(k) and a guy with a $10,000 IRA pay the same expense ratios, one of them is getting rooked.
I don't think Wall Street Journal reporters are being ruthlessly exploited by a profiteering management. The performance of its stock demonstrates that Dow Jones doesn't give a damn about profits.
They're simply being disadvantaged by an employer whose attention to the plan is perfunctory and certainly not focused on participants' individual bottom lines. Some of those participants are apathetic, as well.
One of the paper's veteran reporters told me by e-mail, "I'm embarrassed to say I don't know enough about the plan" to have an opinion about it.
Nationwide, only about 70% of eligible employees even participate in 401(k) plans. If, however, some of the savviest investors in the 401(k) universe neglect this vital issue, who will pay attention?
Focus on your plan
Well, how about you? To put the spotlight on 401(k)s plans, I need inside information. Not company secrets -- just basic information about investment options, costs and the match.
I've yet to come across a big company willing to tell the world what it's forced by circumstance and federal law to tell its own workers. If you'd like to see your plan put under the microscope, drop me a line at timothy@middleton.net.
This multi-trillion-dollar industry could stand some public exposure.
| Dow Jones & Co.'s 401(k) investment options | | Option | Morningstar rating | | Dow Jones (DJ, news, msgs) stock fund | n/a | | Fidelity Magellan (FMAGX) | 2 | | Fidelity Blue Chip Growth (FBGRX). | 3 | | Fidelity Diversified International Fund (FDIVX) | 5 | | Fidelity Mid-Cap Stock (FMCSX) | 4 | | Fidelity Equity-Income (FEQIX) | 3 | | Fidelity Growth Company (FDGRX) | 3 | | Pimco NFJ Small Cap Value I (PSVIX)* | 5 | | Fidelity Spartan U.S. Equity Index (FUSEX) | 4 | | Vanguard REIT Index Admin (VGSLX)* | 3 | | Fidelity Dividend Growth (FDGFX) | 4 | | Fidelity Four-in-One Index (FFNOX) | 4 | | Fidelity Spartan Extended Market Index (FSEMX) | 2 | | Fidelity Small Cap Independence (FDSCX) | 4 | | Fidelity Spartan International Index (FSIIX) | 4 | | Fidelity Freedom Income (FFFAX) | 3 | | Fidelity Freedom 2000 (FFFBX) | 3 | | Fidelity Freedom 2010 (FFFCX) | 3 | | Fidelity Freedom 2020 (FFFDX) | 2 | | Fidelity Freedom 2030 (FFFEX) | 2 | | Fidelity Freedom 2040 (FFFFX) | 4 | | Fidelity Balanced (FBALX) | 4 | | Fidelity Asset Manager (FASMX) | 3 | | Dow Jones Inv Cont (stable value) | n/a | | Vanguard Inflation-Protected Securities (VIPSX)* | 5 | | Fidelity Intermediate Bond (FTHRX) | 3 | | Fidelity U.S. Bond Index (FBIDX) | 4 | | Fidelity Retirement Money Market | n/a |
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Notes: n/a - Not applicable. * - Not managed by Fidelity. Morningstar ratings: 1=worst; 5=best.
Source: MSN Money
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: Dodge & Cox Stock Fund.
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