Should I roll my 401(k) over to DFA?

Q: Would you comment on DFA as a place to roll over a 401(k) account as a retirement investment?

I've read about DFA and they seem to match what others are saying in retirement books that I've read; that a fund with low transaction fees and a passive style of investing is a good target for our long-term investment. It also would appear that DFA has a good track record and very good people running it. I'd need to work through a financial advisor and I believe that I've found one with low annual fees. My hope is that the financial advisor would steer us to the right DFA funds to put our savings. Am I missing a critical issue or two if I were to use DFA funds (in general, I don't have specific DFA funds targeted yet)?

Our current situation is that we have a 401(k) account through my company worth about $800,000. I'll retire in about three years. (When that happens I believe for both myself and for my wife that a low-fee financial advisor would be a good thing.) I will have a reasonable pension and social security income. Later when my wife retires she'll have a pension. Our total retirement income will be around $100,000 without withdrawals from our 401(k) money.

Would you advise us on our plan to use DFA?

A: I think you're sort of putting the cart before the horse. Most people don't start with the idea of a fund group and then subsequently find an advisor. But that's the way Dimensional works -- only through advisors. And, of course, they have a list of recommended -- fee-only advisors -- hoping to make sure there is no conflict in the advisor's recommendations. I'm sure you've been to their site.

While no one can promise you that the "scientific" Dimensional approach will do better than simply diversifying among your funds, it's certainly worth giving it a try. Problem is, you won't know until you do try it -- and with your own money!

These are truly brilliant market experts. I've known Rex Sinquefeld, who founded the company, since I interviewed him more than 30 years ago! At the time I thought indexing was the coward's way out! It has since proven to be a simple and sound strategy. Dimensional claims to take it one step farther. But even Nobel Prize winners make mistakes. With all due respect to Myron Scholes, he was the architect of Long Term Capital Management! I just point that out so you realize that no individual genius, or group of them, has yet managed to beat the market consistently over the long run. OK, well maybe Warren Buffet is the exception who proves the rule!

So be sure to use your own common sense, and follow your own instincts for how much risk you can tolerate in your portfolio.

Terry Savage is a registered investment advisor and the author of the newly published The Savage Number: How Much Money Do You Need To Retire? (256 pages, Wiley, $24.95).