As the U.S. retirement plan industry prepares for new cost disclosures in 2012, here’s a simple fact to remember: The surest and quickest way to reduce participants’ all-in cost of retirement plan ownership is to add index funds to the menu.
You can help plan sponsors hit just about any cost-target by adjusting the mix of index funds, and then educating participants on their cost advantages.
To help you advocate for index funds, a valuable piece of ammunition is an updated version of the study False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas by Laurent Barras, O. Scaillet, and Russ Wermers.
A free download is available here.
By studying actively managed mutual fund performance over time, the authors found that most of the risk-adjusted outperformance (“alpha”) produced in recent years was due mainly to luck, not skill:
“Specifically, we observe that the proportion of skilled funds decreases from 14.4% in 1990 to 0.6% in 2006…Thus, although the number of actively managed funds dramatically increases over this period, skilled managers (those capable of picking stocks well enough, over the long-run, to overcome their trading costs and expenses) have become exceptionally rare. Further, it is quite surprising that the estimated proportion of skilled funds is statistically indistinguishable from zero.”
To learn more about the new retirement plan cost disclosures coming in 2012 and how you can profit from them, see: “Takeover plans: ‘Sweet spot’ in retirement market“