Charlie Munger Said 401(k) Plans Should Only Offer Index Funds – No Other Investment Options: 'It's The Logical Thing To Do'

The late Charlie Munger, a billionaire investor and Warren Buffett's longtime business partner, had strong opinions about how 401(k) plans should be set up. 

At a shareholder meeting in February 2021 for the Daily Journal Corporation, Munger openly shared that their 401(k) plan for employees offered only one option – index funds. "We have just put in a 401(k) plan for the Daily Journal Corporation," he said. "What are the investment options for the [employees]? Zero. It is all index funds."

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Munger didn't think this was just a good idea – he called it "the logical thing to do." He was a longtime advocate of keeping things simple when it came to investing and believed that sticking with index funds was the best move for most people.

The rationale behind Munger's push for index-only 401(k) plans wasn't just about convenience. First, index funds generally have lower fees than actively managed funds and over time, these savings can make a big difference in retirement accounts where compounding works its magic. Second, plenty of data shows that index funds tend to outperform many actively managed funds over the long run.

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Munger wasn't shy about calling out the fees some active managers charged. He explained, "[Active managers] are used to charging big fees for stuff that is not doing their clients any good. It is a deep moral depravity." For him, offering only index funds in 401(k) plans wasn't just about smart investing – it was about ethics.

His love for index funds didn't stop at retirement accounts either. He also said buying and holding an index fund was "the great default position" for most investors. He took a swipe at active fund managers, pointing out that only about 5% consistently beat the averages, while the rest, as he put it, "are living in a state of extreme denial."

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Of course, not everyone saw things his way. Some critics argue that index funds can lead to an overconcentration in certain sectors, which might increase market volatility. Others believe there's still value in active management, especially in niche markets with room for more flexibility.

But Munger stayed firm. He believed index funds were the most sensible option for most 401(k) participants. His decision to structure Daily Journal's plan around this philosophy showed he wasn't just talking – he was walking the walk.

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Munger's push for index-only 401(k) plans wasn't just about lower costs or historical performance but simplicity. His approach aimed to influence how companies and individuals think about saving for retirement and his views remain a key part of the ongoing debate on the best ways to help employees grow their nest eggs.

The best way to structure your retirement savings ultimately comes down to personal preference and financial goals. For those unsure of the best approach or looking to diversify their portfolio, consulting a financial advisor can provide valuable insights tailored to individual needs and long-term objectives.

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