A report from the Center for Retirement Research argues in favor of having a limited choice of funds in retirement savings programs similar to the TSP, as well as restrictions on the ability of investors to move money among funds frequently.
It said: “Due to the growing influence of 401(k)s, researchers have examined numerous aspects of the investment choices made by plan participants. Virtually all the findings suggest that the individual investor does not make very good decisions.”
The report meanwhile looked at what happened when the administrators of such plans—in the TSP’s case, that would mean its governing board—added or dropped investment options. In many cases, that involved dropping options that had been performing poorly and adding those that had been performing well. However, once those changes were made, the added funds did worse while the dropped funds did better.
“This finding suggests that plan managers were chasing returns, but their efforts to tinker with their fund selections had essentially no impact on overall performance. The outcome underscores the traditional investor’s caveat that past performance does not predict future returns,” it said.
The study’s conclusion: “The mutual funds that 401(k) administrators select achieve investment returns that are worse than com¬parable indexes.”