by: Adam Shell
from:  Investor's Business Daily
May 24, 1999

Do you have the right mix of stocks in your 401(k)?   If you own four or five mutual funds from the same fund family, you probably think you're getting exposure to a wide variety of stocks.  Don't be so sure.

Your retirement portfolio might be less diversified than you think.  So says a study conducted by Roxanne Fleszar, president of Financial Resources Management Corp. in Peabody, Mass.

Indeed, even though you own a bunch of funds with different investment objectives, you might unknowingly end up with the bulk of your money invested in, say, large-cap growth stocks.  This despite the fact that most 401(k) plans now offer between six and nine investment options.

The reason:  Mutual funds offered in 401(k) plans may have different names - but that doesn't necessarily mean they own different stocks.

An analysis of funds in 401(k) plans offered by the Fidelity, Putnam and MFS fund groups found that the top 10 stock holdings were remarkably similar within each family.  "Too many funds had the same holdings, " Fleszar said.

As of Feb. 28, General Electric was a top five holding in 12 of the 15 Fidelity funds analyzed.  And software giant Microsoft was among the top five positions in 10 of Fidelity's offerings.

(It's important to note that placing a big emphasis on a handful of stocks, especially in what's been a narrow market dominated by large-cap growth stocks, has benefited many Fidelity investors.)

Similarly, as of Sept. 30, Exxon and Philip Morris were among the five biggest holdings in three of the six Putnam funds studied.  At MFS, Microsoft was a top 10 holding in eight of 11 funds; it was the No. 1 holding in six portfolios.

The findings suggest that chief investment officers and analysts are increasingly driving stock selection at many fund families, Fleszar said.   Fund managers, it seems, are being fed the same ideas.  The bottom line:  Funds are looking more and more alike.

"I think more mutual funds are buying and selling in tandem," Fleszar said.  "If top officers at fund companies say it's time to lighten up on America Online or Pfizer, all the managers do it at the same time."

Not Aware of Overlap
What's alarming is most investors aren't aware of the overlap.  That makes it tougher for investors to get their asset mix right.

"The theory of diversification has been taught to 401(k) investors on a very simple level," Fleszar said.  "But only a few investigate the underlying composition of the funds they buy.  And those that do may be surprised by the lack of diversity in their plan options."

So what's a 401(k) investor to do to make sure he doesn't unwittingly put all his retirement savings into one basket?

Do your homework before you make your fund selections, says Dee Lee, author of "The Complete Idiot's Guide to 401(k) Plans."

"Investors should take the time to find out what's inside these funds," Lee said.

Here's how:  Look at the entire menu of fund offered in your plan.  Find out what types of stocks each fund invests in.  Get to know each manager's investment philosophy.  A quick read of a fund's prospectus and a review of its top 10 holdings should suffice.

More Aggressive?
You might discover that a conservative-sounding fund, such as a growth-and-income fund, is a lot more aggressive than its name implies.  Or you might find that two growth funds with different names rise and fall in tandem.

Your goal, of course, is to find a mix of funds that gives you exposure to different kinds of stocks.  If all six choices are large-cap funds, don't bother investing in all of them.  It's a lot simpler to pick just one, Lee says.

To get the diversification you want, however, you'll need to treat all your investments as one big portfolio, Lee says.  If you want some small-cap exposure but your 401(k) plan only offers large-cap funds, consider devoting other investments, such as an IRA or your wife's 401(k), to small caps.

Another way to make sure your assets are allocated properly is to invest in a so-called "life cycle" fund, says Robert Liberto, vice president of Segal Advisors, a New York-based consulting firm.

"It's a simple way for an investor to save for retirement," he said.

Based on one's time horizon and risk tolerance, these funds try to ease investment headaches by investing in the right mix of big and small stocks, value and growth stocks, and bonds.