401k Plan Fund Review and Selection Fundamentals. As a retirement plan sponsor and fiduciary, you should be regularly reviewing and monitoring the funds in your plan’s investment lineup. Of course, you should have a written investment policy statement (IPS) that lays out exactly how your fund review process works, but if you’re not sure how often to do that or which criteria you should use to determine if an investment option stays or goes, keep reading.
A recent article from financial services marketing solutions provider WealthManagement.com breaks down the process of reviewing and, if necessary, replacing the investments in your plan. First, how often should you review your funds? Well, that’s sort of up to you. Standard practice is at least annually, and some sponsors even review their funds semi-annually or quarterly, often with help from the plan’s financial advisor, if your plan has one. Frequent fund reviews are important to “ensure they’re performing as expected relative to goals identified in the investment policy statement and relevant benchmarks.” Unexpected events — like a well-known fund manager leaving a firm, for example — can, and should, warrant a review of your plan’s investment offerings, as these things can impact whether or not that fund remains appropriate for your plan.
A fund’s performance and suitability can be evaluated in a variety of ways. The article from WealthManagement.com suggests looking at a variety of qualitative factors — when originally selecting a fund for consideration as an addition to the plan’s lineup — and quantitative factors for ongoing monitoring. The article suggests screening for qualitative factors such as “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.” On the other hand, quantitative factors could include “performance consistency, fees, portfolio turnover and various risk metrics that consider downside deviation and up/down market capture statistics.”
Having processes like these in place allows sponsors and plan fiduciaries to demonstrate, without a doubt, that they are following a systematic, unbiased review and monitoring process when it comes to a plan’s investment lineup. Moreover, if a fund’s performance or other metrics become a concern, you can use a similar process to identify a replacement. Plus, having a documented, consistent process in place provides an added layer of protection for plan fiduciaries in case of an audit.
You may partner with a 3(21) co-fiduciary, or you may have hired a 3(38) investment manager who handles all investment decisions for the plan. In either case, these providers may assist you in determining when and how new funds are added to or removed from the investment menu, and in monitoring the funds on an ongoing basis. Nonetheless, as fiduciaries, sponsors should always make sure they remain informed about all decisions concerning the plan and its investment line-up.
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