There are many good companies to manage your money. However, if you are in an employer-sponsored 401(k) or 403(b) plan, your employer will have two or more companies already selected from which you can choose. There are for-profit mutual fund companies that manage funds for investors and manage retirement accounts for companies and their employees The largest U.S. for-profit mutual fund companies are BlackRock, Charles Schwab Company, and Fidelity Investments.
There are also nonprofits that manage funds for investors and manage retirement accounts for companies and their employees. The largest non-profit mutual funds in the U.S. are Vanguard and TIAA. I recommend that you use Vanguard. Currently, Vanguard manages $5.6 trillion in assets and is a very low-cost mutual fund, due to the fact that they are a non-profit. Vanguard’s average mutual fund expense ratio is 0.10%, whereas the industry average is 0.63%. Their philosophy is based on research that shows no mutual fund has beaten the stock market index averages for more than two years in a row, and it is impossible to guess which will be the one to beat the S&P 500 each year. Jack Bogle, Vanguard’s founder, began offering index funds to customers and charging fees way below industry average. Vanguard has since expanded into many other mutual funds in various sectors. For more, look back to the previous chapters on investing.
Each year, Vanguard reports data on all their investors in How America Saves. The report notes that in 2019, the average account balance in Vanguard Retirement Accounts was $106,478. In 2019, 73% of retirement funds were allocated to stocks and the rest to bonds, cash, and other funds. There is no need to look at all the tables of asset allocation by age, but I think the contrast between the asset allocation of 25- and 65-year-olds is interesting:
Table 15.1. Asset Allocation by Age
But which mutual fund should you invest your retirement fund in? The traditional, conservative money manager would advise you invest in a mutual fund that is composed of either 60% stocks and 40% bonds or 70% stocks and 30% bonds. Stock prices rise in economic expansions and bond prices tend to fall, while stock prices fall in recessions and bond prices tend to rise. Thus, whatever the economic conditions, your portfolio can achieve some balanced stability. Here are the returns on these conservative portfolios as reported by Vanguard at the end of 2019:
Table 15.2. Rates of Return on Defined Contribution Plans
Source: Vanguard
I do not recommend either a 60/40 portfolio or a 70/30 portfolio for your retirement funds. I explain this in more detail in the lessons on investing. However, for a simple reason, look at the returns of the benchmark S&P 500 above compared to the 60/40 and 70/30 balanced funds. My recommendation is to invest your retirement funds in an S&P 500 mutual fund. This fund has all the S&P 500 stocks in it and will achieve the in S&P 500 Index increases. According to historical records, the average annual return since its inception in 1926 through 2018 is approximately 10%-11%.
I also do not agree with the conventional wisdom that you should decrease the share of stocks and increase the share of bonds in your portfolio as you get closer to actual retirement. The traditional advisor will say that your share of bonds should be related to your age. For example, when you are young, invest your retirement fund in a 60/40 mutual fund. When you turn 50, change your allocation to 50/50. At 60, change your allocation to 40/60.
Several mutual fund companies even offer what are known as Target Date Funds, which automatically increase over time the share of bonds versus stocks in an individual’s retirement fund once they pass the age of 50. The traditional advice makes no sense to me, given that the average return on the S&P 500 over the historical record (10%) is double the average return on bonds (5%). I am not the only advisor who feels this way.
In my opinion, you should keep all your retirement savings in an S&P mutual fund, until you are two years from retirement. Then each year make sure you move two years of your estimated expenses in retirement to a bond fund and continue to have two years in a bond fund every year of retirement. That way you will continue to achieve double the returns in retirement while protecting yourself from having to sell stocks in a down market to pay for retirement expenses.