Advisors Weigh In On Index Funds For Boomers

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Baby boomers who ask financial advisors whether index funds should be part of their retirement saving strategy may get very different answers depending on whom they look to for advice.

Some advisors say they are avid index fund fans and use them as a building block in retirement plans. Others are cooler to the idea, noting that there are actively managed funds that can provide returns as good as an index fund.

Those index fund returns, according to Morningstar Inc, Chicago, are 14.28% year to date, and 10.18% for a one-year average.

Index funds “dampen volatility and enhance returns,” says enthusiast Gordon Bernhardt, a CFP practitioner with Bernhardt Advisory Services, McLean, Va. He cites a lower expense structure for index funds than for actively managed funds in part due to greater tax efficiency from holding securities rather than more active trading a managed fund would experience.

For boomers approaching retirement, Bernhardt recommends reducing equity exposure by investing less in equity index funds and more in fixed income index funds that buy securities with a maturity of less than five years.

Scott Kays, a CFP practitioner and principal of Kays Financial Advisory Corp., Atlanta, says index funds are effective when used in the large cap stock area.

The reason, he explains, is that there is more analysis of that market, and it is more efficient than small- or mid-cap stocks. For those sectors, he continues, it is more possible for a good active manager to find and exploit opportunities.

So, a good approach is to use the S&P 500 Index as a base and then use actively managed funds for mid- and small-cap sectors, Kays adds.

One CFP practitioner who is not as enthused with index funds is Bob Fitzsimmons, a CFP practitioner. One reason he offers is the availability of actively managed funds that he says can outperform prominent indexes. For clients with large investments in an actively managed fund, breakpoints are lower, he says.

Fitzsimmons says that for advisors who rely on commissions for their compensation, index funds do not, for the most part, compensate well.

But Brian Mattes, a spokesman for Vanguard Group, Valley Forge, Pa., a larger index fund provider, says that for the consumer, an index fund offers a low cost of .18% compared to 1.5% for general equity funds and 2% if there is high turnover.

According to Mattes, only one in four managed funds outperforms index funds. “Too many people feel that settling for the markets return is mediocrity,” he says.

But, he adds, that while investors in their 20s can recover from a blunder, for baby boomers, “thats going to be an ouch!”


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 25, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.