Don't Miss

Dear Prudence: Why Your Fund Selection Process Matters

Fund Selection Process

Dear Prudence: Why Your Fund Selection Process Matters. A recent article from the Connecticut Post on how a 401(k) plan’s fund lineup gets selected asks some compelling questions off the bat: “If you were the sole decision-maker standing in the shoes of the employer, where would you start? Would you choose mutual funds that have market-beating performances? Or perhaps funds that employees would recognize by name?”

These questions are interesting food for thought for sponsors. What criteria do you consider when reviewing your plan’s investment menu? According to Julie Jason, JD, LLM, a personal money manager and the article’s author, employers should start with the end in mind. In other words, you should answer the question, what are you trying to achieve for your participants?

Of course, choosing your plan’s investment lineup comes with a metric ton of fiduciary responsibility, so you need to make sure you’re being “prudent” in your selections. As Jason points out, prudence trumps performance when it comes to investment selection. Additionally, your selection process should be “sound, evergreen and manageable,” as you don’t want to be constantly changing up your investment menu, either.

So, how do you adopt prudence? Jason says, start with what you don’t want, i.e., funds that you’re constantly replacing for underperformance or those with penalties or high fees — which aren’t good for your employees. And generally, tax-deferred options are a no-no, unless there’s a darn good reason to justify the typically higher cost.

Having an investment policy statement (IPS) is another prudent practice Jason advises. An IPS enables you to determine, and stick to, the criteria for investment selection and ongoing monitoring, as well as make any necessary adjustments when the funds don’t meet the criteria set forth in the IPS.

In addition, while it’s important to listen to your participants and what they want, they, obviously, cannot be the final word when it comes to investment selection. For example, an employee may gun hard for a specific top-performing or “trendy” fund that doesn’t meet your selection criteria or your idea of what you want for your employee population. In that case, let your IPS, and your vision for the plan be your guide — not your most vocal participants.

Finally, don’t hesitate to get help. More plan sponsors than ever are turning to advisors and third-party professionals beyond their recordkeeper for fiduciary support. As Jason writes, “Participants need to be able to rely on the fiduciary doing his or her job right. Participants have enough trouble choosing from the menu. They should not be burdened by worries about whether their funds were chosen wisely.”

There’s no shame in admitting that you don’t know what you don’t know. Sometimes, calling in an expert is the wisest and most prudent choice you can make.


Check Also

Plan Participant Data

ESG Fund Rules for Retirement Plans Under Review

ESG fund rules for retirement plans are being scrutinized by the current administration.  The fate of using environmental, social, and governance (ESG) funds in retirement plans may be decided before year-end.  A new executive order from President Joe Biden has ...