Exxon Mobil has made a bold move in its new 401k savings plan for employees. The company has announced that it will jettison all actively managed mutual fund choices next year in favor of a roster of indexed mutual funds. The company’s public announcement of the change, along with communications to employees, echoes the findings of academic studies that show active investment management fails to beat an indexed strategy over time. “We’re really not trying to take away anything, but give Mobil employees a better deal because we believe the index funds, on average, will outperform active funds because of fees,” a company official told Pension & Investments, a trade publication.
Exxon and Mobil merged in 1999. Exxon’s employees were already offered indexed funds in their 401k, while Mobil’s employees had 10 actively managed stock and bond funds in their plan. All of those funds, including popular funds like the Jennison Equity Fund, MFS Emerging Growth, and Franklin U.S. Government Securities, will be dumped, the company announced. In their place the plan will offer indexed funds that follow the Standard & Poor’s 500 index, the Wilshire index of 5,000 stocks, an international stock index, and several bond indexes.
The company told employees in a handout that it thinks indexed funds will offer lower cost and lower risk. “Even if active managers outperform the market in one year, there is no indication of what will happen in future years,” the employee communication said. The company gave special attention to the Jennison fund, a hot stock fund popular in 401k plans. Exxon Mobil’s employee communication said the fund merely matched the S&P 500 index over the last 10 years, while the S&P 500 had a lower risk level.
Although few 401k plans use only indexed funds, the approach is common among institutions. Exxon Mobil itself manages its corporate pension plan on an indexed basis. The company had $2.2 billion indexed in the stock market last year. Academic studies have long argued that actively managed funds have a tough time beating—or even matching—the stock market due to high costs and market efficiency.