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The Wizard of Oz is a story about a girl from Kansas, who gets sucked up in a tornado, connects with a bunch of odd ball characters and follows a yellow brick road looking for a benevolent wizard. When they get to the wizard’s palace, they pull back the curtain and find that the wizard is nothing more than a con man from Omaha, Nebraska.

40 million Americans own at least one target date fund in their 401K account. What began as a simple, low-cost investment vehicle has evolved into a complex and expensive one. In this episode, I will peel back the curtain on index funds and explain them in a manner that inexperienced investors can understand.

Target-date funds were created in the early 1990s. The goal was to provide investors with a simple, cost-efficient mutual fund that matches the changes in their risk profile as they age.

In their early format, TDFs were formulaic and passive. Formulaic and passive funds don’t generate big fees, so it didn’t take long before marketing departments of Wall Street started burning the midnight oil, and the underlying mutual funds in TDFs began to change from passive, inexpensive index funds to more expensive, actively managed funds.

An article in the Wall Street Journal document the most recent change in the TDF saga. Over the past decade, the pressure to cut fees has intensified and employers that sponsor 401k plans have drifted away from some mutual funds. Instead, they have been selecting Collective Investment Trusts. CITs are pools of assets offered by banks, and trust companies that are only available to retirement plans such as 401ks.

Does this mean that 401k participants should avoid Target Date Funds at all cost? No. When properly applied, TDFs have the potential to be the best fund solution for a portion of the 401k population. My goal is to alert 401k participants and their plan providers of the need to do a complete and through due diligence before finalizing their investment decisions.

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In my last episode, I made some disparaging remarks about golfers and 401K plan participants. I start this episode with a reader's digest version of my prior commentary. Then I provide a discussion designed to enlighten listeners on how and why to become better managers of their hard-earned retirement dollars.

A golfers handicapped helps them evaluate the quality of their game. There are similar benchmarks that help us evaluate various aspects of our everyday life. There are tables that tell us if we are a 6-foot male, we should weigh 200 lbs. There are Government standards that tell us our two-ton SUV should get 27 mile per gallon. My Cheerios box tells me that when I eat a cup of cereal, I have consumer 45% of the amount of sugar I should consume in a day.

90 million American workers have invested $15 trillion of their hard-earned money in stock market mutual funds. And just like the benchmarks discussed above, there are many who have no clue about the precise amount of return on their hard-earned retirement dollars and how to compare that to what is possible.

For most stock market gurus, the benchmark for investment performance is the return of the S&P 500. Over the course of the past 2 ½ years, in spite of all that’s been thrown at it, the S&P 500 has gained 58.6%. A S&P 500 index fund provides investors that same return for a one tent of one percent fee and no assembly required.

There are two other lesser used stock market indexes that some financial experts also use as a proxy for the market; The Dow and the Nasdaq. Their performance for the same time period as I quoted for the S&P, were 44.3% and 73.4% respectfully. A divergence from the return of the standard set by the S&P that is worthy of note. Both have index funds that, just like the S&P 500, mimic their performance.

My goal for this episode is to motivate you to do your homework and put a hard number on your investment return, not just “Doing OK.” Then and only then can you answer the question; Do I know as much about the performance of my 401k as I do my golf score?

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I recently attended a charity fund raiser. After signing in, I took my assigned seat, and soon afterwards my table mate arrived. We exchanged the required pleasantries, and the conversation quickly turned to golf. She explained to me that she had taken dozens of expensive golf lessons with a local golf pro to improve her handicap but had not been able to get into the single didge range. Then a fellow golfer suggested a free online video and two months later her handicap plummeted to 7. (For those of you non golfers, a handicap of 0 means your average score is par. A handicap of 15 means your average score is 15 strokes more than par)

The discussion then turned to turned to a topic closer to my wheelhouse: 401ks. My table mate explained to me that she had a similar experience with their 401k. For several years, she felt her account was doing poorly. Then a co-worker told her about a red-hot mutual fund. She bought a bunch of it and suddenly her returns dramatically improved.

You will notice in the case of her golf handicap, there was a great deal of specificity. She knew exactly what her handicapped was before and after the video. She had a precise number for her desired score. But as I quizzed her about her 401k’s performance, she failed to produce exact numbers, just vague generalities and feelings. She had no clue as to how the market had performed for the past several years or for that matter what was an acceptable rate of return, given her limited 401k options.

As the conversation continued, I became befuddled by the fact that a person in her position knew so much about her golf score and so little about the performance of her greatest financial asset. Having spent five decades of my life talking to people about their finances, I also realized that this was not in a one off situation.

This Episode is the first in a long series of discussions on how to evaluate your 401k results and help you build a 401k portfolio that makes sure that

YOUR 401k IS A GIFT THE KEEPS ON GIVING.

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