How many of you have x-rayed your retirement plan investment choices? It's a fascinating exercise that I'd strongly encourage you to try. It's not hard. Just enter your investment choices in Morningstar Portfolio Planner at www.morningstar.com. Then you can see how these choices interrelate with each other.

Using Money magazine's Top 20 401(k) funds, I created a hypothetical retirement plan using 12 commonly used funds:

American Century Ultra
Fidelity Blue Chip
Fidelity Contrafund
Fidelity Growth & Income
Fidelity Growth
Fidelity Magellan
Investment Company of America
Janus
Putnam Voyager
Vanguard 500 Index
Vanguard Primecap
Washington Mutual Investors

Let's say these are the choices in your client's retirement plan today. You've got several different fund companies, a wide selection of funds--this should be well diversified, right?

Not necessarily.

One way to start evaluating whether the fund choices you recommend to clients are really as diversified as you think they are is the Stock Overlap Report. It's part of the x-ray analysis. My financial-planning clients love this report because it tells them on a stock-by-stock basis what's in their portfolio. You can run this report using either Morningstar Principia Pro Plus software or our Premium Service at www.morningstar.com.

Using the above hypothetical plan, I ran a Stock Overlap Report. The top two stock holdings--Microsoft and Cisco--are identical in 10 of the 12 funds. The rest of the top 10 stock holdings are also held by no less than six funds each. That's a lot of overlap. With that many funds holding the same stocks, it's very difficult for your participants to diversify. They are likely to be hit harder when that segment of the market is affected. You won't hear about it when the market is going up, but you will when the market is going down.

The plan x-ray can also show you how your choices are diversified by style. In this case, there is good diversification across styles--34% large value and 38% large growth. But there is not much exposure to the mid- and small-cap markets. Other missing components are international stocks and domestic bonds.

What can you do if you find your plan recommendations have too much overlap? Dig a little deeper. Take a look at the funds by category. That will allow you to do a peer comparison that you can use to start weeding out some of the redundant funds. Once you've eliminated some of the overlap, you can make room for some new funds in additional asset classes. Here's how our hypothetical portfolio looks when I sort it by category. A Morningstar category rating of 5 is highest and 1 is lowest.

Large Value	Category Rating
Investment Company of America	5
Washington Mutual Investors	4
Large Blend	Category Rating
Vanguard Primecap	5
Fidelity Magellan	4
Vanguard 500 Index	4
Fidelity Growth & Income	3
Large Growth	Category Rating
Janus	4
Fidelity Growth	4
American Century Ultra	3
Fidelity Blue Chip Growth	3
Fidelity Contrafund	3
Putnam Voyager	3

There are lots of ways to evaluate which funds to keep in the retirement plan -- Morningstar category ratings are just one screening technique. What's important is that you take a careful look at the choices in your plan and find alternatives that give your participants a wide variety of investments that can create a well-balanced portfolio. X-raying your plan can help give you additional insights into your current and future plan options.

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