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Mind the (Return) Gap

08/12/2019
By Jack Towarnicky

What You Do Know Can Hurt!

A week or so ago, I posted a blog on the Wealth Gap. A gap does exist; however, studies show that plan sponsors are making significant strides towards closing the “retirement savings wealth gap” by deploying automatic features.1

This week, Dr. Derek Horstmeyer posted an article on the Return Gap2 - suggesting that “… more mutual-fund disclosure may be a case of too much information. … Investors in funds that disclose information less frequently don’t tend to move in and out of positions as much. … Investors in funds that disclose most frequently suffer the biggest gap between the funds’ returns and their own, because of the investors’ excess trading of fund shares and tendency to buy high and sell low.”

Many investment professionals have compared chasing market returns to dogs chasing cars.

Too often, investors panic and transfer out at the bottom of the market and transfer monies in at market highs. So, on average, investor returns trail the fund’s return. Alight Solutions 401(k) Index confirmed participants were very active in 2018. Unfortunately, too many retirement investors chased the market. Thankfully, net trades in 2018 amounted to only 1.42% of assets – a record low year. During 2018, equity holdings declined from 68.6% to 66.6%.3

Morningstar’s Mind the Gap4 analysis showed that diversified domestic-equity funds earned 8.9% for the 10 years ending March 31, 2018, compared to a typical investor’s return of only 8.3%. The .61% shortfall per year was a modest improvement over a similar study for the 10-year period ending December 31, 2016. For comparison, balanced funds (including allocation funds and target date funds) had a .3% per year surplus for the same 10-year period ending March 31, 2018.

So, just like the Wealth Gap, plan sponsors can close the Return Gap - you can teach an old dog new tricks - automatic features including a Qualified Default Investment Alternative.


1J. Towarnicky, Financial Independence is the Greatest Civil Liberty! 04/10/19, Accessed 8/6/19 at: https://www.psca.org/blog_jack_2019_22
2D. Horstmeyer, “The Downside of Knowing a Lot About Your Mutual Fund”, Wall Street Journal, 8/4/19, Accessed 8/6/19 at: https://www.wsj.com/articles/the-downside-of-knowing-a-lot-about-your-mutual-fund-11564971181?mod=searchresults&page=1&pos=3 3J. Towarnicky, Investment Thrills & Chills – Volatility, 4/16/19, Accessed 8/6/19 at: https://www.psca.org/blog_jack_2019_23
4R. Kinnel, Mind the Gap 2018: Investors made good use of mutual funds in an up market. 8/21/18, Accessed 8/6/19 at: https://www.morningstar.com/articles/878600/mind-the-gap-2018

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