Warren Buffett's 2008 bet with hedge fund managers offers a direct lesson for 401(k) savers: low-cost index funds can outperform actively managed investments.
The S&P 500 index fund Buffett selected returned 125.8% over the decade ending in 2017, beating all five hedge funds chosen by Protégé Partners. The best-performing hedge fund returned 87.7%. The S&P 500 delivered an average annual gain of 8.5%, while the five hedge funds posted between 0.3% and 6.5% average annual gains.
Fund fees matter. A 1% expense ratio on a $100,000 balance costs $1,000 annually. A 0.10% ratio on the same balance costs just $100. Since fees compound as a percentage of your portfolio, high fees erode returns significantly over decades.
Vanguard and Fidelity Investments offer funds with expense ratios below 0.1%, according to the report. Index funds typically charge these lower fees. Buffett wrote in his 2017 shareholder letter that "fees never falter" — meaning funds collect charges even when returns are poor.
If your 401(k) holds high-fee funds, you can switch to lower-cost alternatives. Index funds tracking the S&P 500 or Nasdaq Composite historically deliver competitive returns without the expense drag of actively managed funds.