There’s an old saying: Don’t throw out the baby with the bath water. Trustees of Chevron’s 401(k) retirement plan should have remembered that bit of folk wisdom before they tinkered with the plan’s investment options.
The “bathwater” that was thrown out in this case was the actively managed Artisan Small Cap Value Fund, which once had a great track record but later ran into hard times, winding up in the cellar of its peer group’s performance.
The “baby” that was thrown out — but which should have been kept — was the entire asset class of small-cap value, arguably the most valuable (pun intended, but applicable) equity asset class for long-term investors.
Had Warren Buffett been at that trustees’ meeting, he would almost certainly have persuaded them to keep the baby while dumping out the bath water. Had I been there, I would have done my best to achieve the same result.
Chevron Corporation has approximately 64,700 employees, according to Morningstar. Presumably, the majority of them rely on the company’s 401(k) plan for their long-term financial future. That means they must rely on the judgment of the plan’s trustees, who decide which investment options are available.
When the trustees met last year to revise those options, they made several sound decisions:
- They added the Vanguard REIT Index Fund, giving employees a low-cost way to invest in commercial real estate.
- They added the SSgA Inflation Protected Bond Index Fund.
- They removed the Artisan small-cap value fund, which ranked in the bottom 5% of its peers over the past five years.
- They replaced an actively managed small-cap blend fund with the Vanguard Small-Cap Index Fund, a much lower-cost alternative.
But at the same time, the trustees let plan participants down by failing to add a small-cap value index fund. Vanguard has an excellent one, so it would have been easy to do.
The result is that tens of thousands of Chevron employees don’t have access to small-cap value stocks in their retirement plan. I think that’s unfortunate — and I suspect Warren Buffett would agree.
Chevron is far from the only large employer without this asset class in its plan. In a study of the 100 largest retirement plans in the country, I found that only 42% included U.S. value stocks at all, let alone small-cap value.
Still, Chevron is a particularly disappointing case for three reasons. First, the trustees were already making changes. Second, small-cap value was clearly on their radar. And third, they already had access to Vanguard index funds.
I wasn’t in the room, but I can imagine how the discussion went. Someone likely argued — based partly on the recent performance of ARTVX — that small-cap value stocks had outlived their usefulness. Someone else may have noted that participants had been hurt by small-cap value, without mentioning that the real problem was the poor fund choice made years earlier.
The consensus may have been something like: “Let’s give them a small-cap blend fund. That will include some value for those who believe in it.”
This illustrates an important point: retirement plan trustees are not immune to what’s popular or “trending.”
The stakes are high. This issue has enormous financial consequences for American workers, as detailed in a recent Consumer Reports article that I strongly recommend.
In the late 1990s, many workers thought their trustees were out of touch if they didn’t offer Janus funds. Those funds took big risks, made a lot of money for a few years, and then lost much of it when the market turned.
In Chevron’s case, I wish I had been able to speak with the trustees beforehand to explain the long-term case for small-cap value investing.
Over the past 15 years, small-cap value stocks produced annualized gains of 9.4% — about 20% higher than the 7.8% return from small-cap blend stocks. Did the trustees ever look at that?
Going back even further, over the past 87 calendar years, small-cap value stocks returned 13.6% annually versus 12.2% for small-cap blend stocks. That doesn’t sound like an asset class that has “outlived its usefulness.”
Buffett has made most of his fortune as a value investor. Many Chevron employees would probably like the opportunity to follow a similar approach with part of their retirement savings.
Trustees shouldn’t force participants to make the “right” choices. But they should provide the tools that allow participants to make informed choices.
If an asset class is a tool, then Chevron employees have lost one of the most important ones. Fortunately, plan options can be changed. I hope some employees will take this information to their trustees and encourage them to add the Vanguard Small Cap Value Index Fund.
I’d welcome the chance to revisit this topic someday and give those trustees a public pat on the back for doing the right thing.
My advice is simple: if your retirement plan doesn’t offer the asset classes you believe in, organize with your peers and ask the trustees for a chance to educate them.
You have little to lose — and potentially a great deal to gain.