From
Your Perspective:
Making sense of your 401(k) investments
Index funds
Your 401(k) may offer a stock
or bond
index fund.
Index funds are designed to mirror
the performance of a specific market index,
either by owning all of the stocks or bonds in that
index or by holding a representative sampling that
will produce parallel results.
The most common index funds in 401(k) plans track the Standard & Poor’s
500 Index (S&P 500), generally considered the benchmark for large-cap performance,
or the Lehman Brothers Aggregate Bond Index, the standard for evaluating the
performance of investment-grade corporate and government bonds. Some plans also
offer a broader-based fund, such as one tracking the Wilshire
5000 Index, which includes all stocks trading on the major U.S. markets.
Pros and cons of index funds
Pros
Insulation from the manager’s potential miscalculations, such as selling stock too soon or too lateFees significantly lower than the fees on actively managed fundsAutomatic diversification, since most indexes include a large number of securitiesStrong performance in a strong market
Cons
Weak performance in a weaker marketMarket-capitalization weighted indexes and the funds that track them are driven mostly by a few large-cap stocksNot all index funds tracking the same index are equal, as some provide weaker returns
