The performances of funds in plans’ lineups vary over time and new investment options emerge. Developing a process for reviewing and replacing plan funds is an important practice from multiple perspectives, including the performance of fiduciary duties.
Cincinnati-based Pension Corporation of America explains its fund monitoring process in each plan’s investment policy statement, according to Seth Priestle, CFP, MBA, the company’s director of retirement plan consulting. “Every quarter we run a plan’s funds through our monitoring report, and we send the report to the sponsor,” he explains. “We then get together and meet face to face to more formally review all of the funds with the sponsor I would say, typically semiannually, and in some cases it’s just annually. We have a handful of clients that we do meet with quarterly. Ultimately, that’s up to what the plan sponsor wants to do.”
John Faustino, AIFA, PPC, chief product and strategy officer at Fi360, a fiduciary education, training and technology company in Pittsburgh, says that existing funds should be reviewed at least quarterly by the advisor to ensure they’re performing as expected relative to goals identified in the investment policy statement and relevant benchmarks. A significant unexpected event impacting one or more managers can warrant an investment review, he adds. For example, when a prominent investment manager leaves a fund—think Bill Gross leaving PIMCO—the advisor should consider whether or not that impacts the investment’s appropriateness for a given plan going forward.
You can evaluate a fund’s performance and suitability across multiple qualitative and quantitative dimensions, such as management tenure, cost and risk-adjusted performance, among other factors. The process at Unified Trust Company in Lexington, Ky., relies heavily on quantitative factors for monitoring and more on qualitative factors when initially selecting a fund for inclusion in a plan lineup, according to Andrew Windsor, CFA, retirement investment analyst. All options are screened with peer groups rather than a specific benchmark, Windsor notes, and the firm uses Morningstar reports to determine appropriate peer groups.
The quantitative factors that Unified Trust Company measures include performance consistency, fees, portfolio turnover and various risk metrics that consider downside deviation and up/down market capture statistics. The qualitative factors include manager tenure and turnover, the presence of a consistent, repeatable investment philosophy and process, portfolio managers’ personal investments in their funds, and performance when the stated investment style is both in favor and out of favor with the market.
Pension Corporation of America runs plans’ funds through 11 proprietary screens, says Priestle. The screens include three different risk-adjusted return measurements; the firm also considers factors like expense ratios and management tenure in actively managed funds. “We then apply a weight to each screen, placing the most emphasis on the screens we deem most important,” he says. “From those weights, we compile a score from zero to 100, so that plan sponsors have a quick-and-easy scorecard or snapshot of how each of the funds performed through our entire monitoring process.”
Time to Go?
Review procedures like these provide documentation that the consultant and sponsor are following a systematic, unbiased review. Should a fund’s performance or another factor become a concern, a similar process can identify potential replacements. Typically, a quantitative fund screen is done to cull the broad fund universe to a select set from which advisors make more nuanced decisions using both additional quantitative and qualitative factors, says Faustino. These steps articulate the rationale to the plan sponsor for any made or recommended changes; documenting the change process provides protection if the plan is audited.
Which party makes the final stay-or-go decision depends on the circumstances. “In many cases, we serve as a 3(21) advisor so we’re a co-fiduciary on the plan,” says Priestle. “In all those cases, we’re making decisions together with the plan sponsor and its investment committee. For some plans we serve as a 3(38) investment manager on the plan, in which case we do have the ability to unilaterally make the decision, though in an ideal scenario we’re always trying to keep the plan sponsor in the loop every step of the way.”