By Mark Olsen, Managing Director at PlanPILOT
Employer-sponsored retirement plans are for long-term savings, as the investment landscape changes, you may find that some of your fund offerings are outdated, expensive, or underperforming their respective benchmarks.
As the plan sponsor, it’s your fiduciary responsibility to make sure your plan funds reflect the best interests of your participants. This usually requires regular monitoring of your investment fund menu and making updates as you see fit.
With that in mind, here are three signs it may be time to add or replace investment options in your company’s retirement plan:
1. You’re Seeing Lower Fees Among Similar Plans
Your plan doesn’t need to have the lowest fees, but the fees should be reasonable for your participants. Thankfully, it’s now easier to review plan fees and assess whether or not you’re overpaying. But, keep in mind, you should only compare your fees to similar plans.
For example, comparing fees for a passively managed index fund to that of an actively managed mutual fund wouldn’t be fair or consistent. Instead, compare fees within similar types of funds and asset types—index funds with index funds, mutual funds with mutual funds, international stocks to international stocks, and so on.
2. You’ve Noticed Discouraging Changes
Funds change over time. You may notice that a particular fund in your investment lineup has had a change in management, is now owned by a different investment firm, or has had a change in philosophy that no longer aligns with your plan’s needs. If this happens, it may be time to let it go and replace it with another.
Remember, as the plan sponsor it’s your responsibility to act in the best interest of your plan participants. And, you only have a set number of options you can offer to your employees. If something is no longer fulfilling its original role in your plan’s menu, consider taking a second look.
3. Performance Has Been Subpar Over the Long-Term
To be clear, it’s completely normal for investments to underperform from time to time and you shouldn’t fixate on random time periods when evaluating investment options.
For example, low-beta funds are known to underperform during strong markets and provide stability during down markets. If we’re currently in a strong market, you may be tempted to swap this investment out with a better-performing one, but doing so may expose your plan participants to unnecessary risk.
When evaluating an investment’s performance, be sure to look at the long-term. Rather than focusing on returns only, consider other metrics like the Sharpe Ratio or the Sortino Ratio. (1) These evaluations can shed light on a fund’s true performance.
Does Your Employer-Sponsored Retirement Plan Need Updating?
Ideally, no plan sponsor should have significant turnover when it comes to swapping out funds. Not only does this confuse participants, but it also adds more administrative work for your company. Yet, replacing funds from time to time is critical to ensuring your plan participants have access to the best funds possible.
A recent study by Morningstar found that monitoring your employer-sponsored retirement plan fund menu can improve performance significantly over time. The study analyzed the results from 3,478 replacements across 678 defined contribution plans from January 2010 to November 2018. It found that, on average, replacement funds historically performed better and had lower expense ratios than the funds they replaced.
How We Help
If you don’t have the time or expertise to monitor your plan’s investment menu yourself, outsourcing to a team of trusted fiduciaries may be the right next step in helping your employees maintain access to the best options possible. A major benefit of working with us at PlanPILOT is that we actively select, monitor, and replace funds in your plan for you. We also serve as your dedicated plan consultant, helping you make the best-informed decisions for your business. If you’re interested in learning more, give us a call at (312) 973-4913 or email mark.olsen@PlanPILOT.com.
About Mark
Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k) and 403(b) plan sponsors. Drawing on more than two decades of experience, Mark provides institutional retirement plan consulting to 401(k), 403(b), and defined benefit plans. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.
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