How to Research 401(k) Funds on Morningstar

This was prompted by an email from Stephen (a different Stephen from yesterday’s question):

Would you consider 1) writing an overview of the financial tools that are available to look up stocks: Yahoo Finance, Morningstar, etc. 2) key pieces of information that we should be reviewing along with an explanation as to why.

Let’s start with Morningstar. If you’re not familiar, Morningstar is an investment research company that aims to provide normal investors with the information that financial professionals have.

One great service it provides is a search function for pretty much any stock, fund or ETF. When you go to its site, you can see it right at the top of the page.

To research a fund, look at your 401(k) fund options. Your employer likely offers around eight to twelve different funds, although some offer far more. To make a more informed decision, you can input the fund name itself, or its ticker symbol, into Morningstar’s search bar. For example, your company might offer the following:

  • American Funds American Balanced | ABALX
  • Fidelity Blue Chip Growth | FBALX
  • JP Morgan Large Cap Growth | OLGAX
  • T Rowe Price Growth Stock | PRGFX
  • Vanguard International Growth | VWIGX

And so on. Input the name into the search bar, and you’re taken to a new profile page.

The quote that you see isn’t necessarily the most important thing to look at, as you should be interested in investing for the long term. One-day price fluctuations, then, don’t really matter to you. But as you can see, it also breaks down expenses and investment style/category right there on the main page. 

The pages you’ll want to pay attention to are Performance, Portfolio, Expense and Purchase. Performance shows you, well, how the fund has fared historically (remember you’re interested in long-term success, though past performance does not guarantee future results). Portfolio breaks down what the fund is made up of, including companies, industries, sectors, the stock/bond mix, etc. If you’re trying to invest in a broad market index fund, it should have dozens to hundreds of different holdings. (Think about it: The S&P 500, which your fund may be trying to track for example, is made up of 500 different companies.)

Expense details the expense ratio, and indicates how the price compares to other funds. You want to look for large cap funds with expense ratios below one percent, and small cap/international funds with expense rations under 1.25 percent.

Passively managed funds will have lower expense ratios than actively managed funds, and (likely) perform better as well. “Vanguard 500 Index (symbol VFINX), which mirrors Standard & Poor’s 500-stock index, has outpaced 80 percent of all actively managed large-company, U.S.-oriented stock funds over the past three years,” writes Kiplinger. It has an expense ratio of 0.14 percent, and you can find other broad or total-market funds from the likes of Vanguard and Fidelity with fees lower than that (if your employer offers them to you, that is).

Finally, Purchase tells you if there are any qualifications for purchasing shares, like minimum investments. You might also consider Morningstar’s rating, though I’d look at the other categories first. 

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