As a plan sponsor, it is your responsibility to select the investment offerings for your organization’s retirement plan. This responsibility carries a lot of weight, as you want to be sure that your investment selections are the right vehicles to help your retirement plan participants meet their long-term financial needs. High-quality options are a must, which is why it is crucial to take time to evaluate what investments best fit the needs of your participants. After selection, it’s critical that you continually monitor these investments to ensure they meet the needs of the participants and make changes when it’s deemed prudent to do so.
I will discuss what best practices to keep in mind when choosing investment options for your retirement plan, from evaluation, to selection, and to monitoring the results. By utilizing these tactics, you can ease the burden of making investment decisions so that you can focus on other important tasks. All of what I am about to talk about should be spelled out in the written Investment Policy Statement (IPS) adopted by you, the plan sponsor. At the very least, this document should be reviewed annually to ensure the IPS stays consistent with the needs of the Plan.
Evaluation and Selection
What’s the most important thing to consider before selecting which investments you’d like to utilize for your retirement plan? Your participants, of course. This may seem straightforward but focusing on your participants and their investment needs is of the utmost importance when acting as a plan sponsor and fiduciary. Historically, plan sponsors once agreed upon the idea that the more funds available, the better for participants. This trend has since subsided due to participants often over-thinking and over-analyzing which investment(s) best suited their needs and opting not to participate at all. When evaluating what investment options are best for your organization it’s quite simple; the simpler, the better.
Another key factor to evaluate is the cost of the investment. When it comes to investing, you don’t necessarily receive what you pay for. Take time to evaluate the cost of an investment, and don’t assume that the more expensive an investment option, the better it will perform. Higher costs tend to be a significant headwind relative to an investment’s performance. Over a long period of time, this can significantly lessen the actual net-of-fee return the participant receives, which can in some cases equal tens of thousands of dollars. This is not to say that you should go out and find the lowest cost investment (usually an index fund) and go with that. Often times there is a legitimate argument that a more expensive actively managed fund makes more sense than an index fund when looking at relative investment philosophy, performance, risk metrics, and management style. If you are unsure about the cost of your retirement plan, the investment costs, or whether your fees are meeting fiduciary requirements, BerganKDV offers a complimentary fee benchmark that provides you with the data you need to see how your plan stacks up to others and confirms your plan is meeting the needs of the participants and current regulations.
After considering your participant’s needs and cost comparing funds, you will want to ensure your participants are able to construct a well-diversified portfolio. The old saying, “Don’t put all your eggs in one basket” holds true in the investment world. One of the biggest decisions retirement plan participants make is how to construct their portfolio to minimize risk and maximize gains. Offering a well-diversified investment menu of Cash, Bonds, US Stocks, and Foreign Stocks, allows participants to spread their assets out among a handful of different asset classes. Just remember what we covered earlier, simpler is better, so don’t go crazy adding a whole bunch of fund options among many asset classes, or your plan participants will feel overwhelmed.
Once you have achieved the milestone of selecting your investment options for your retirement plan, it’s now time to make sure you’re monitoring those investments to ensure they continue to meet the needs of plan participants. Metrics often used for evaluating investments are both short and long-term performance (Both relative to a benchmark and a respective peer group), costs of the investment, investment philosophy, manager tenure, and many more. All of these metrics used for monitoring and evaluating the investments should be specified in the written IPS. As these metrics change based on the needs of the plan participants, be sure to update your IPS to make sure you’re following the document accurately. Anytime you make an investment decision (add, remove, replace, etc.) you should be documenting the process you went through to evaluate that decision and demonstrate that the decision made was in the best interest of plan participants. Most often, when a plan sponsor finds themselves in fiduciary hot water due to a decision like this, it’s because they were not able to show the process they went through in making that decision. Be sure to document!
Many plan sponsors are beginning to hire independent advisors to act as a 3(21) co-fiduciary or a 3(38) investment manager to assist with the monitoring and selecting of the investments in the retirement plan. While advisors are not new to the retirement plan industry, they are becoming more and more popular among plan sponsors to help manage the fiduciary liability associated with sponsoring a retirement plan. You may be wondering what the difference is between a 3(21) and 3(38) advisory relationship? Simply put, a 3(21) co-fiduciary advisor provides recommendations and you the plan sponsor will be the decision-maker when it comes to the investments. A 3(38) co-fiduciary investment manager takes on the decision-making responsibility from the plan sponsor completely, providing the highest level of fiduciary protection when evaluating and selecting investments.
At BerganKDV, our Retirement Plan Solutions team works directly with plan sponsors to help make difficult investment decisions easier. Curious about what we can do for your organization? Contact us with questions on your retirement plan needs and we will be happy to see how we can assist.
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal, or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management,