Benchmarking Your Retirement Plan Funds
Benchmarking is a retirement plan best practice that allows plan sponsors the opportunity to "take a peek under the hood" of their retirement plan. The process allows you to compare your plan to similar plans, measuring key metrics such as fee reasonableness and breadth of options. Benchmarking should be a key part of your due diligence process and when assessing your company's retirement plan.
To get started, let’s use a familiar analogy. If your company’s retirement plan was a car, then the plan’s investments would be like the components and features of your vehicle. They would range from the engine and power steering, to features like back-up camera, cruise control, power windows, Bluetooth and more. The features you select will depend on your preference and driving needs. However, for now, let’s begin with the basic car model – or in the retirement plan world, we call these investment menu options the 404(c) list of funds.
The basic retirement plan investment menu would
include five (5) investment categories:
— Large Cap
— Small Cap
— Stable Value/Money Market
Each play an important role and there are always options with each selection. Just like a car, your investment menu may offer different types of investment categories. While searching for appropriate investments for your plan, it is a best practice to speak with an investment professional for support. They can help to find, narrow, and provide a list of investment options that aim to meet the objectives of the plan and diversity of the participants.
With the basic mechanics of your 404(c) list established,
it’s time to actively monitor, or benchmark them.
Benchmarking best practices:
— Implement an Investment Policy Statement (IPS)
— Create criteria for fund selection and removal within the plan
— Monitor the investment menu
— Evaluate the cost associated with each investment
— Possibly hire a 3(38) Investment Manager
— And very importantly, document conversations, notes and actions
Additionally, it’s important to remember that each participant has a different retirement time horizon and risk aversion. Therefore, when plan fiduciaries are selecting the investmen
ts for the plan, it’s important to consider different investment options that are
in the best interest of the various employee populations.
As you select and review mutual funds for a plan’s investment menu, it’s important for sponsors and fiduciaries to understand the different share classes and their related fees, as well as how they impact plan costs and participants’ ability to optimize their retirement savings. Fund companies typically offer multiple share classes, each sporting its own unique letter. (A shares, C shares, I shares, R shares, etc). As you review the many different options available out there, remember the cautionary words delivered to Indiana Jones: “you must choose, but choose wisely.”
Qualified Default Investment Alternative
Another investment option to consider is a qualified default investment alternative, better known as a QDIA. This is a particular investment that is utilized by participants who do not make their own choice. Adopting a QDIA can help plan sponsors manage exposure to liability from the investment decisions (or lack thereof) made by their plan participants. Without one, fiduciaries could be held liable for losses when
a participant fails to actively direct their investment.
There are Four Different Types of Approved QDIA Funds:
Target Date Fund: Creates an investment allocation based on participant's age, retirement date and life expectancy.
Balanced Fund: Offers a mix of equity and fixed income investments.
Professionally Managed Account: This is actively managed
by investment managers and provides an appropriate asset mix of equities and fixed income for each individual participant; this also takes into account the primary decision factors of age, retirement date, and life expectancy.
Stable Value Fund: This serves as a capital preservation product for the first 120 days of participation and offers an option for plan sponsors who want to simplify administration if employees opt out of participating before incurring additional tax.
Take the time to document each investment. If you have any questions or want to talk through strategies, we can help.
A key goal of a retirement vehicle is to provide employees with a suitable vehicle that, like a car, can fuel their drive toward a successful retirement destination.