Do money managers earn their keep?
A reader is concerned his portfolio of low-cost funds isn't good enough...can high-priced management help?
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (MONEY) - QUESTION: I have my retirement account diversified among six different funds whose annual expenses range from just under 0.4 percent of assets to roughly 1.1 percent. But I'm considering rolling my money into a "diversified investment portfolio" that divides my money among a variety of investment options.

The pitch is that my money will be overseen by a fund manager who will use his professional judgment to re-allocate and re-balance my account. My concern is that I'll be charged 2 percent a year. Help! I'm a science teacher, not a financial expert. Do you think I would be better off switching to this account?

-- Greg Norris, Spring Branch, Texas

ANSWER: It sounds to me that what you're getting is a glorified asset allocation account -- basically a manager diversifying your money among a variety of different asset classes -- and that you're paying a premium price for that service.

In fact, if you calculate the average fee you pay for the six funds you currently own (and, hey, you're a science teacher, so get to it), I wouldn't be surprised if you find your annual expenses would double if you go with the diversified portfolio option.

I'm not saying the manager won't do a decent job for you. But the question is, can he or she can add enough value to justify a fee of 2 percent of assets a year?

How well can you do on your own?

The answer depends in part on how well you can do on your own. If your six funds represent a decently diversified mix of assets that is appropriate for a person of your age and risk tolerance -- or you're willing to do a bit of work to create such a portfolio -- then I'd doubt that any manager is going to show much of an improvement in results while also skimming an extra 1 percent per year off returns.

If, on the other hand, your six funds aren't so much a coherent portfolio that represents a real strategy but are just a collection of "funds that looked good at the time" -- and you're not up to the task of turning that motley collection into a real portfolio -- then you could be better off even after paying the higher fee.

So the question you've got to ask yourself is this: Am I willing to do a little work to make sure I've got a balanced portfolio? Or do I want to pay someone else 1 percent of my account value year after year after year to do this for me?

The DIY approach

Fortunately, these days it really doesn't require a whole lot of effort to put together a decent portfolio of funds in an employer-sponsored retirement account, whether it's a 401(k) like you see at most companies or a 403(b), which is the 401(k) equivalent for teachers, non-profit workers and many local and state government employees.

The simplest way to get a diversified asset mix appropriate for your age is to invest in a target-retirement or lifecycle fund. They're available in about 30 percent or so of 401(k) plans, although that percentage is growing fast.

You just pick a target fund whose date roughly corresponds to the year you wish to retire -- 2005, 2010, 2020, whatever -- and that's it. The fund starts with a mix of stocks and bonds that's right for someone your age, and then gradually tilts that mix more toward bonds as you approach retirement. To learn more about how these this "no brainer" funds work, click here.

If your plan doesn't offer this option, don't despair. You've still got several choices that don't involve tons of effort. One is to look at how a target-date fund for someone your age has allocated its assets and then try to mimic that mix as best you can with individual funds available in your plan.

You can use the Vanguard Target Retirement or T. Rowe Price Retirement funds as a guide.

Another way to go is to go to our Asset Allocator tool to get an asset mix that's appropriate for you. You could then fill that mix by choosing funds in your plan that correspond to the asset categories in the pie chart the tool will give you.

If you're not sure which asset category funds from your plan fall into, you can find out by plugging their ticker symbols into our quote box. (Your plan probably also provides this sort of information on the funds available to you.)

Finally, while you're at it, you might as well also check out our MONEY 65, a list of recommended funds to see if any of them are available in your plan. If they are, it would certainly make picking suitable funds a lot easier.

Cover the bases

All in all, I'd say that if you're willing to put in a couple of hours a day for several days, you should have little trouble putting together a perfectly decent portfolio. Remember, perfection isn't the standard because no one -- not you, not even some professional manager -- knows how to build the perfect portfolio.

What you're trying to do is create a portfolio that covers the bases as far as different asset classes are concerned and that has reasonable fees. And once you've arrived at that decent portfolio, remember to rebalance annually to bring it back to its original proportions.

Or, you could pay 2 percent a year and have someone else do this for you. Just remember, though, that the extra money you're shelling out is money that you could otherwise be spending in retirement. Top of page

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