In last week's issue of Financially Fit we began our discussion of making the most of your 401(k) program by reviewing the various types of mutual funds that might be available in your plan, including equity, fixed-income, balanced, foreign, and money market funds.

Additionally, we mentioned the range of investment strategies that may be available through a 401(k) - such as conservative, growth, value, blended, income, or balanced. And, finally, we emphasized the importance of determining the best strategy for your personal financial goals.

Once you have completed this review and analysis, you are well on your way to customizing your 401(k) plan and creating a foundation that will help you fulfill your long-term financial requirements and goals. All that's left is to compare your plan's available fund selections to determine which ones are the optimal investments given your objectives.

And, as with any investment, several critical factors must be examined:

Performance: The funds' actual returns (investment appreciation + dividends) are key comparison measures. In a great market, a large percentage of mutual funds will do well; that's why it is extremely important to look at a fund's returns over a multi-year period. I would suggest that you compare returns on a 3-year, 5-year and 10-year basis. And it is best to look at the annual numbers, not the cumulative figures, as they will disguise the true fund returns and won't tell you a thing about the consistency of the performance. For example, if the fund had one really great year, but 9 so-so years, the 10-year return might look pretty good, but that would not give you the accurate story of the fund. 

It also makes sense to review not only at the returns of the fund, but also the track record of the fund manager.  Since some funds frequently change managers, the fund's performance alone may not paint a true picture of what the future may hold under the direction of a new investment manager.

There are many companies that offer these statistics, but here is one of the best:

http://www.morningstar.com/

And very importantly, please be aware that just like any other investments, past performance is not a guarantee of future success.

Another important consideration when looking at funds is the associated Costs & Expenses.  These costs come in several forms.

Loads: Some funds charge front-end loads, ranging from 2-6% of the monies you initially invest. Note that funds may also charge a front-end load for reinvesting your dividends back into the fund.

Back-end loads may range from 4-5.75% of the funds you redeem or cash out, in the 1st year of ownership, but then may subsequently decline until they reach zero, in about the 6th year.

Some funds do not have front- or back-end loads, and are called No-load funds.

Expense ratios: These expenses are the cost of doing business, and include administrative and management fees. They are calculated as a percentage of net assets managed. The current average for domestic funds is 1.4%, bond funds, 1.1%, and international funds, 1.9%.

12b-1 fees: These fees are marketing and distribution expenses. They are included in the fund's expense ratio, but often separated out as a point of comparison. They are charged in addition to loads, and even no-load funds may have them.

Taxes: When a fund manager sells a stock from the fund at a profit, the gain is taxable. Short-term gains (for investments held less than one year) are taxed at a higher rate, at your individual income tax rate, while long-term gains (for investments held more than one year) are currently taxed at 15%. Many investors tend to forget about taxes on funds since they aren't privy to the fund manager's everyday buying and selling of investments and the losses and gains accrued, and are often surprised by the tax bite at the end of the year. Consequently, it would be wise to pay attention to the next important item on our list…

Turnover: This refers to the frequency of trading undertaken by the fund manager. The more buying and selling in a fund, the higher the turnover rate, and the greater the potential tax bite. This is another area in which index funds are advantageous, as their managers generally trade less than actively-managed funds, so they usually accrue lower tax bills.

Portfolio Strategy is of utmost importance when comparing funds. It will do you no good to compare the returns and expenses of a growth equity fund with that of a bond fund; you must compare apples with apples.

And one warning: It would be to your benefit to double-check the funds' holdings and see if they are in line with the stated portfolio strategy. I'm rarely surprised to find the majority of holdings in something other than what the fund's prospectus dictates.

Now, you can find all of this information on the Morningstar web site. And for additional help in calculating mutual fund fees and expenses and comparing them, try these sites:

• http://www.sec.gov/investor/tools/mfcc/mfcc-int.htm
• http://www.sec.gov/edgar/searchedgar/prospectus.htm

Here are just a few more helpful hints when deciding on the funds you want in your portfolio:

1. You might want to avoid smaller funds, or those with less than $50 million in assets under management, as their expenses may be too high. For the same reason, steer clear of new funds unless they are part of an established fund family, as investors often find themselves subsidizing a new fund's startup costs.  
2. Think twice before buying larger, over $1 billion equity funds, as they may be so unwieldy to manage that their returns may not be as good as similar, smaller funds. 
3. Take a look at the experience and tenure of the portfolio manager. If he is new to the fund, find out if he came from another fund and what his experience and performance was at his former employment. 
4. Compare the holdings in the fund's portfolio with similar funds, as well as with the other funds you are considering. I have often found that many funds overlap their holdings and investors are frequently investing in very similar funds although their stated strategies may be very different. 
5. Beware of funds that rationalize their high costs just because of the type of funds they are. For example, the expenses at some growth funds are higher than value funds, for no reason that I can come up with. Similarly, sector funds often cost an investor more than diversified funds, which makes absolutely no since since they require fewer analysts with expertise in different sectors.

Now, pull out that packet your 401(k) administrator gave you and just follow these steps and it won't take long before your retirement plan is underway or back on track. And don't forget, as your lifestyle changes, you may want to tweak your plan here and there to maximize your personal investment goals.