If the term “smart beta” gets you scratching your head, don’t worry, you’re not alone. But chances are, you have heard about it, at least once in the past year. For many HR professionals that have been thrust into the role of plan sponsor, managing the company retirement plan can be a daunting task. It can be like learning a new language each month for a year. Regulation, investment terms and managing employee outcomes is a very difficult job.
So, why should you worry about what investments are in the company 401k or 403b plan? Technically, it is your responsibility, even though you may have an advisor and a company that manages your plan investments. But mostly it will help you communicate with your staff and understand the inner-workings of the plan being offered to employees.
You don’t need to be an expert, but with a little plain English explanation, you can do your job with more confidence at the next investment committee meeting…or even impress a few friends at your next dinner party.
So what is “Smart Beta” anyway?
Smart beta refers to an investment strategy that has both “Passive and “active management” elements. The “active part” refers to the idea that Smart Beta Strategies seek to outperform an index or benchmark, like the S&P 500 Index (as opposed to just buying a fund that mirrors the S&P 500).
The passive side of “Smart Beta” is based on the idea that the investment strategy is pre-determined, using transparent and well-documented strategies to make investment selections. An example would be buying lower-priced company stocks for a certain industry based on a cyclical pattern. An example would be to buy the lower-priced stocks of airline companies when the price of oil drops.
According to Sara Shores at Blackrock, “Smart Beta strategies try to target those ideas that are: value-creating, well understood, persistent and diversifying over time.
Since the strategy of Smart Beta plans is pre-determined, Smart Beta plans will generally carry lower fees and aim to deliver the returns of an actively-managed strategy.
