Getting the most from your Microsoft retirement plan
EDITOR’S NOTE: To gain the fullest benefit from this article, we suggest you also read “How to maximize your 401(k) investments.”
by Paul Merriman
This article has two purposes. The first is to outline the process I use for evaluating a 401(k) program’s investment choices. I recommend you use the same process with your own plan. The second purpose is to give my specific recommendations for the Microsoft plan. You’ll find those at the end of the article.
Microsoft is one of the largest companies in the world, with seemingly endless resources of brainpower and money. It could easily offer dozens or even hundreds of 401(k) investment options to its employees. But acting with what I think is admirable restraint, the company offers just 16 options in its 401(k) plan. Unfortunately, those options don’t cover all the important asset classes I recommend. Instead, a few asset classes are duplicated while others are left out. (This is not particularly unusual.)
For example, the Microsoft plan has three U.S. large-cap growth funds and two U.S. small-cap growth funds, but no small-cap value fund. On the international side, there’s a large-cap fund and a large-cap value fund, but no small-cap or emerging markets funds.
Here’s the lineup of funds offered: Vanguard Value Index (large value), Vanguard Growth Index (large growth), Fidelity Growth Company (large growth), Fidelity Magellan (large blend), Fidelity Contrafund (large blend), Vanguard Institutional Index Plus (large blend), Artisan Mid-Cap (mid growth), Managers Fremont Micro-Cap (small growth), Royce Low Priced Stock (small blend), ING International Value (international large value), Fidelity Overseas (international large blend), Oakmark Equity and Income (U.S. moderate allocation), PIMCO Total Return (U.S. bonds), Fidelity Intermediate Bond (U.S. bonds) and a money-market fund.
When we evaluate a list of plan options, we start by looking for the best choices in each asset class we want. Here’s how we did it with the Microsoft plan.
U.S. large-cap blend: This plan has three such funds. Our choice is a no-brainer: Vanguard Institutional Index Plus, an index fund with an incredibly low annual expense ratio of 0.03 percent. Magellan and Contrafund are not horrible funds, but they have two serious strikes against them in our book: They are actively managed and much more expensive.
U.S. large-cap value: The plan has only one fund in this category, making that choice easy, especially since it’s a low-cost Vanguard index fund.
U.S. small-cap blend: The one fund in this category, Royce Low Priced Stock, is a good choice.
U.S. small-cap value: Microsoft’s plan doesn’t have such a fund. In lieu of that choice, we recommend Managers Fremont Micro-Cap. Even though its portfolio is weighted toward growth, its emphasis on the smallest companies should be worthwhile.
Real estate: This isn’t an option in the Microsoft plan.
International large-cap: Fidelity Overseas is the only offering here. Even though it’s actively managed, it provides broad geographical exposure.
International large-cap value: ING International Value fills this slot nicely.
International small-cap blend and small-cap value: There are no options here – nor any in emerging markets (an omission that is fairly common). Consequently, we would allocate only 30 percent of the equity part of this plan to international, with the other 70 percent in U.S. funds, where an employee’s retirement savings can capture the expected premiums for value stocks and small-cap stocks.
Our equity recommendations for the Microsoft plan:
| Recommendations, Microsoft plan | |
| Fund | Percent of equity portfolio |
| Vanguard Institutional Index | 10% |
| Vanguard Value Index | 30% |
| Royce Low Priced Stock | 15% |
| Managers Fremont U.S. Micro-Cap | 15% |
| Fidelity Overseas | 15% |
| ING International Value | 15% |
For the fixed-income part of the plan, we’d use a 50/50 combination of PIMCO Total Return and Fidelity Intermediate Bond.
While the resulting allocation is underweighted to value, underweighted to international and underweighted to small, it still provides a good first step toward proper diversification. Microsoft employees should use their IRA and taxable accounts to beef up their exposure to small-cap international stocks and to U.S. value stocks.
For further reading:
The following articles at FundAdvice.com should prove helpful:
- ‘The Ultimate Buy and Hold Strategy’ tells why we recommend what we do. Its principals are not complicated, and once you understand them you will know more about investing than most people ever do.
- ‘Fine Tuning Your Asset Allocation’ tells why you should control the risk of an investment portfolio and tells you how to do it.
I also recommend the following retirement-related articles:
- ‘Retirement: When Your Portfolio Starts Paying You’
- ‘The Best Mutual Funds in the World’
- ‘Retirees: Earn Lower Returns, Have More Money’
