Case Study: 401(k) at Behemoth Corporation ______________________________________________________________________ Joe was a mid-career manager who started working at Behemoth Corp. in May of 2001. Behemoth had an outstanding benefits plan and he was eligible to participate in the company's 401(k) in June of 2001. Joe wasnt very experienced in investments but, he knew that he had to start contributing as much as possible right away give himself the best chance at an adequate retirement in the future. Together with the generous company match Joe was contributing $1,000 per month to his retirement plan. The current plan was very basic and Joe only had the following three choices available: TICKER NAME CATEGORY FCNTX Fidelity ContraFund Large US Stocks DODFX Dodge&Cox International Stock Large Non-US Stocks PRDSX T. Rowe Price Diversifed Small Small US Stocks Given that Joe was not really experienced he naively split the monthly contribution among the three funds equally. He would casually review his 401(k) statements at year end and, as long as the balance was growing he was satisfied that he was on track for retirement and did not give it much further thought. In the fall of 2014 Joe enrolled in an introductory Investments class as part of the MBA program at a local college. By the end of the course he had a much better idea of some of the basic principles of investing. He felt badly that he had not paid more attention to his 401(k) and specifically the investment choices he made as part of his portfolio. Joe went home to look at the December 2014 statement that were recently delivered. He also researched and reviewed what information he could on the three mutual funds. This included the prospectus of each fund, the fees and the performance history. He summarized the monthly performance for each fund since June 2001 (spreadsheet Exhibit 1). Through the class he realized that these funds were actively managed and that the fees of 1.50% each were rather high as compared to other investment choices. He also knew that he should have been comparing the performance of the funds with their respective benchmarks during the last 13 1/2 years but thought that was water under the bridge at this point and he was better served to focus his attention on the future. As a first step he wanted to get a handle on where he was right now and consider future options. Before he could start he wanted to reconcile his statement to the fund performance he researched. Upon looking at the fund performance and the statement he noticed that the balances were less than what he calculated using the advertised gross of fees performance reported by the funds. This left him a little confused. In January 2015 Behemoth was introducing a few new more choices to the 401(k) options. In order to round out the offerings they added an S&P Index Fund, which tracks the S&P 500 Index exactly, a bond fund (PTTRX - PIMCO Total Return Fund) and a money market fund (Currently paying 3.00%). The three choices previously offered were all equity funds so these new investments offered a passive option and two different asset classes (Fixed Income and Cash). Assimilating all of this information Joe decided that he needed more experienced help so he turned to you. Joe emailed you a spreadsheet on his fund research which contained monthly security return information on the funds (including the new ones). He also included some questions for you to help him answer. The first tab in the sheet addresses questions on the portfolio that he has accumulated to this point. The questions also include understanding the current mutual fund returns and why their portfolio balance doesn't match they information they researched. He is also interested in learning more about the portfolio itself and its composition. He learned in class that Modern Portfolio Theory can help him to decide investment choices with a portfolio viewpoint and that diversification is a key element in managing a portfolio. In that theory, correlation among the individual asset choices has more effect on the performance and risk of a diversified portfolio more than any other factor. Joe wants to simplify his portfolio in the future and be more deliberate about the investment choices he makes. He also realized that risk tolerance is key to determining the proper allocation of the portfolio. Through a self-examination Joe determined that he is generally a conservative investor. The next tab sheet specifically examines potential portfolios for Joe based on his specific factors goals and risk tolerance as well as the elements of MPT. This will help guide him in choosing among the alternative investments to build his future portfolio. He is hoping to get information from you about which funds to select among the choices and what allocation to target for each fund to be as efficient as possible.