Connect with us


When is Your Investment Monitoring Good Enough?


photo-1438211891462-006dc8998ef1 copy.jpg

As you’re probably judged in part on the return on investment of your work, why should your plans investment monitoring be any different? While pension law says that you will be judged on your investment process, is it not prudent to include performance output as part of the process? The Nirvana is to have first quartile fees and first quartile performance. Excessive fees decrease performance. Are you paying too much or are your employees paying too much? Let’s start with understanding where your employees’ investment results stand.

Investment monitoring and performance

Examining where your performance stands requires getting third party information that compares your plan to the universe. We use a couple of comparison sources to see where your plan stands. If not us, I recommend that you work with a fiduciary provider that uses third-party research to compare your plan against.

The Center for Fiduciary Studies recommends establishing a plan benchmark. For example, you might choose a mixture that is based on 50% S &P 500 index and 50% Aggregate Bond Index.

If you are using a target date strategy for your qualified default investment alternative I recommend pick a benchmark that most closely represents the current asset allocation of your qualified default investment alternatives. Working with one of my private wealth clients on her retirement planning, we found that combining 80% S&P 500 and 20% bond index tracking investments had outperformed by a significant measure the recommended target date option for her age group. Of course, she opted out of the qualified default investment alternative.

Investment monitoring and plan fees

Many employees are still under the impression that they pay nothing for their plan. Employers and employees often fail to realize the costs they bear, typically embedded inside of the investments. Think of the costs being grossed up in order to cover the costs. Both employer and employee received disclosures of the fees starting a couple of years ago. However I have yet to meet a plan sponsor or employee that actually knows that these disclosures actually happened.

Have you examined your record keeper’s disclosure of plan fees? I’ve talked with many plan decision-makers that either did not know about this regulation, knew where to find the information or third have been able to find the time to do a comparison themselves. Suffice it to say that most companies seem to be focused on direct cost to them rather than indirect costs. This seems to be totally rational. Unfortunately it’s not what the law expects that you will do. The Department of Labor understanding how difficult it was to try to track down this information as a plan decision maker thought to have a fee disclosure sent to you in plain English. However that’s had many challenges in implementation. If you have not done so I recommend that you hire a fiduciary adviser at least on a contract basis to help you understand your fees. One of my clients found that their fees were embedded into a report that she would not have noticed except for our review meeting where I uncovered that issue for her. She has since found a new Record-keeper with a more transparent model. In another case, it appeared to the decision-makers that they were paying direct costs of about $3000. Unfortunately there was about $100,000 worth of indirect expenses being charged to the plan that was reducing the individual participant’s balances. In their case this was a huge cause of the bottom half investment returns experienced by their employees.

Investment monitoring and education

If your performance is poor, your fees are reasonable and have top half fund scores then investment literacy is the likely culprit. To address this you have a couple of tools for your toolbox. One is the use of a qualified default investment alternative, the employee investment decision safe harbor and employee advice. The use of a qualified default investment alternative requires proper selection and monitoring. The investment decision safe harbor often referred to as 404 (c) requires annually completing a list of actions to qualify. Advice in this context means one-on-one advice from a fiduciary adviser.

What’s the next step

  1. Find out if your existing service providers are working in a fiduciary capacity. If not skip to 4.
  2. Ask them to assess how your investment performance compares to others.
  3. Have them analyze how your fees compare to plans of similar size.
  4. Find a fiduciary retirement plan adviser to do an independent analysis using independent research. You could choose to have this paid out of plan assets or separately by the company. Remember that you don’t have to have the lowest fees but need to be able to show that your employees are getting a good deal for the fees they pay. That being said if your plan has poor performance and has high fees you’ve made things worse by charging the analysis to the plan. Many fiduciary advisors include this plan analysis as part of their services to the plan.

You can contact us to get you started immediately.


Continue Reading