- The Washington Times - Monday, April 27, 2009

DES MOINES, Iowa | Your first quarter 401(k) statement arrived in the mail, but it remains unopened because you are afraid to see how much more you’ve lost. You are not alone.

“Investors are going to see that they’ve continued to contribute in the first quarter and their account still went down,” said Dean Kohmann, vice president of 401(k) plan services at Charles Schwab & Co. “People will need the encouragement and advice to keep doing the right things; keep on investing, keep on taking advantage of your company match.”

To determine whether your 401(k) is on track, the quick and easy benchmarks to note are the Standard & Poor’s 500 Index, which fell 12 percent in the first quarter, and the Dow Jones Industrial Average, which dropped 13 percent. But there’s more to assessing your plan’s performance.

For instance, you will want to look at the specific funds in your portfolio, not just the overall picture. You will need to choose the appropriate benchmarks for each so you are not comparing your fund with an inappropriate index and becoming misguided by the results. This process can help you spot any true laggards and should help educate you on how to make some changes to improve performance.

“The sad reality is people use the wrong benchmark to make decisions,” said David Tysk, senior financial adviser with Ameriprise Financial Inc.

One might assume that an appropriate comparison for a large-cap stock fund, for example, would be the S&P; 500 Index, which fell 12 percent in the first quarter after dropping 38 percent in 2008.

If you had, let’s say, in your 401(k) the Vanguard Large-Cap Index Fund (VLACX), you could look it up to find it was down 11 percent for the first quarter and 38 percent in 2008. If you are looking at an index fund, you will want to see similar performance, or look for an explanation.

However, straight comparisons like that are not always accurate indicators for actively managed funds, Mr. Tysk said. There could be things happening inside a fund that might not be apparent to an investor without further research. The fund managers could have left, for example, causing performance to drop significantly.

So, if you decide to take on some homework, here are a few steps to take.

• Gather information. The information provided by your 401(k) funds likely will give you a benchmark index, such as the Russell 2000 or the S&P; 500. If that information isn’t easily obtained, you will need to decide whether you want to spend the time and energy to gather that information for yourself, Mr. Tysk said.

Morningstar Inc. has tools that can help you research your fund; how long the management team has been in place; what its overall strategy is; and list of some of the fund’s largest holdings.

• Use the correct time period. You need to make sure you are using the same time frame to measure your fund against the index, whether it’s for a three-month period, or a year or more.

• Tap the Internet. Naturally, there is an array of Internet tools that can help do the benchmarking. Among the sites with useful tools are www.ishares.com, www.google.com/finance and https://bigcharts.marketwatch.com.

One type of fund that may be difficult to judge is a target-date fund, which automatically sets the mix of stocks and bonds to lower risk as you approach retirement. They typically have a date associated with them that is the approximate year you will retire.

New tools have recently been launched to help benchmark their performance. Morningstar and Dow Jones both have new indexes for these types of funds.

Morningstar’s data provides three indexes for each target date. For example, the 2010 target date fund has a conservative, a moderate and an aggressive index. Users can see the performance for each over a day, week, month, quarter, year-to-date, for one year and three years.

Rod Bare, an index director at Morningstar, said the indexes launched in February hopefully will help investors learn how different investment approaches can affect their fund performance.

Benchmarking can do more than show you how you are doing, it can teach you more about funds and how asset allocation can make a big difference.

Mr. Bare said studies have shown that more than half of a portfolio’s return is determined by allocation of stocks and bonds.

“If you could just get folks to get their equity and their bonds inside those international and domestic funds in the same ballpark as a model portfolio,” Mr. Bare said, “you would do yourself a world of good.”

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