Three Things to Think About Besides Retirement Plan Investments
Plan sponsors often have an unhealthy obsession with assembling the ideal array of plan investments. However, investment array selection, as well as the inherent agonizing over which funds to put on watch, which to replace, etc., should be relatively low on a plan sponsor’s list of priorities.
Why? Because positive participant retirement outcomes often have very little to do with the decision to replace Fund X with Fund Y. At the end of the day, the goal for most plan sponsors is to ensure that participants have adequate savings for retirement. So rather than agonizing over plan investments, plan sponsors should instead pay close attention to some of the items below:
- Fees: In my opinion, the only true predictor of future investment performance is lower fees, not past performance, manager ability, or investment style. Let me repeat that: lower fees. And yes, I realize that plan sponsors don’t have to select the lowest-cost funds for plan fees to be considered “reasonable” under the fiduciary standards of ERISA (and any applicable state law, if not subject to ERISA). But in today’s litigious environment, if a plan sponsor selects the more expensive version of a fund, which accomplishes the same thing, from an investment perspective, that a cheaper one does, they had better have a good (and documented) reason for doing so. And “We need to choose Fund X to subsidize the recordkeeping costs of the plan” is NOT it.
- Participant retirement readiness: For most participants, the most important factors for ensuring sufficient retirement income is how much is saved and how early one starts saving; this is regardless of investment return. A plan’s recordkeeper should be able to provide a comprehensive report as to which participants are hitting their retirement goals and those who are not. But that is only half the battle: plan sponsors must also work closely with their recordkeepers and advisers to ensure that the number of people who are not adequately saving for retirement is as close to zero as possible.
- Investment diversification: If a plan’s asset growth is below benchmark, it is likely due to improper investment diversification by plan participants (and NOT the quality of investments in the plan). How many of the plan participants are 100% invested in a fixed or stable value fund? Or invested in multiple target date funds, when one will do? What about employer stock? A prudent plan sponsor knows the answers to these questions and is working with their recordkeeper and adviser to address any participant investment diversification deficiencies.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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