Because we help our clients manage their Intel 401k, retirement contribution and SEPLUS accounts, we frequently get asked, ‘what are the best funds in the Intel retirement plan?’ Just give me the list: should be pretty simple.
Well it’s not quite that straightforward and here’s why. Picking the best investment options is a little bit like picking the “best” flavor of ice cream—pretty hard to do right? There are many good flavors of ice cream and the “right” one for you may vary depending on your individual palate, your current mood, and where you’re buying the ice cream: are they famous from something? Do they have a specialty? Is something in season? You get the idea.
Picking the ‘best’ investment fund is similar. The best fund for you is going to depend on your individual goals and objectives and matching that with what’s available in the Intel retirement plan.
Navigating the Intel Investment Options
Now you may be thinking this sounds difficult, but like any key decision, it’s made easier with a proper process. Here is our 4-step framework to navigating the Intel retirement plan.
Step 1: Select Your Allocation The different asset classes you own are the main building block of your portfolio. These are things like U.S. Large-cap stocks, Government bonds, REIT’s, etc. Having a target allocation is important as it’s going to determine how much risk your portfolio has and what kind of return you should expect. Additionally, having a mix of different assets (called diversification) is important as different assets perform differently in different environments. Your allocation should align with and be in support of your individual goals and objectives.
The main point here is that before selecting any investment funds, you should determine what percentage of each asset class you should own based on your goals and objectives, and what level of risk are you comfortable taking. Are you portfolio 1, 2, 3, or something else?
Step 2: The Active or Index Decision The next big decision to make is whether to use actively managed or index funds. With Actively managed funds, the goal is to beat a benchmark versus Index funds that attempt to track a benchmark. It may seem preferable to have the chance of beating a benchmark, a chance to outperform, but active funds come with a major drawback: higher costs. These higher costs are a big reason why the research shows the majority of actively managed funds fail to beat their benchmarks: higher fess and worse performance. Not exactly a good trade-off.
It’s important to understand the distinction between active and index funds, to determine which you prefer to use, and make the your choice intentionally.
Step 3: Minimize Expenses The next factor to consider is costs. Within the Intel retirement plans there’s a wide range of costs (or expense ratios) between the investment options. In the Intel 401k account, the lowest cost fund is the Vanguard Institutional Index fund (a large-cap US stock fund) at .02% annually, The highest cost fund is the Global diversified fund at 1.56% annually. And some of the most popular funds are the highest cost funds. The target date fund series, with annual expenses around 1.3% annually make up 44% of the 401k account and the Global diversified fund option has $5.8B invested in it.
Make sure to analyze your fund costs and ask yourself is it worth the cost? Or is there a less expensive option that will give you the same investment performance for lower fees.
Step 4: Analyze Fund Performance Here you want to assess whether the fund you are considering is performing inline with expectations. With actively managed funds this means are they beating the benchmark they set out to beat: are you getting rewarded for your higher fees? For an index fund this means is it tracking it’s index well.
As an example let’s take a look at the Dodge and Cox stock fund that’s available in the Intel retirement plan. Over the last 10 years, it’s failed to beat the S&P 500 index in 5 of the 10 years with the maximum positive difference of 8% and a negative difference of 6%. Compare this to the Vanguard Institutional Index fund with had a maximum deviation of 0.2%.
So the question is: The Active fund clearly hasn’t been a consistent outperformer, but do the good years make up for the bad? In other words, do you get rewarded for this yo-yo performance? Unfortunately, no. Over the past 10 years you would have paid (or given up) .6% annually for this roller coaster ride—as the Dodge and Cox fund returned 7.4% annually versus 8.0% for the S&P 500 index and the Vanguard fund.
So with actively managed funds in order to be successful, you have to both be able to pick the outperforming funds, and we saw this is only the top 10-20% of the funds in most areas so a pretty higher bar already, and be able to stick with the funds through the positive and the negative years—Making an already difficult task that much harder.
So there it, four steps to successfully navigating and picking the best funds, for your circumstances, in the Intel 401k. Let us know what you think.
For more about applying this framework across all the options in the Intel retirement accounts download our free ebook where you’ll receive:
- How to classify each Intel investment option into the most appropriate asset class
- The lowest cost option in each category
- All the Intel investment options intelligently classified on one page
- Detail on each step in the framework and how to assess for yourself