Monitoring Plan Investments


If there is one thing that is near certain it is that one or more investment options offered in the plan might not work out as expected.  Monitoring plan investments for excessive volatility, manager changes and just plain lousy performance is important if the plan is going to maximize the opportunity it offers participants.

Perhaps the most important component of fund monitoring is setting expectations for a fund when it is added to the plan.  What role should this fund play?  Should I expect volatility? By setting expectations for a fund you create criteria that can be used to evaluate a fund and to know when those expectations have been violated.  There is no reason to add an emerging martkets fund and then get rid of it because it didn't behave like a large cap value fund.  This exercise also helps identify classes of funds that you might consider innapropriate for the plan investment mix. 

Expectations provide a much more valuable set of evaluation criteria than just looking at how the fund performed as compared to an index.  Communicating those expections to plan participants also helps them make better investment decisions.

Fees are an important aspect of the plan to monitor.  We run across many plans where trustees and participants aren't fully informed as to how much they are paying in fees each year.   This lack of knowledge isn't necessarily due to lack of interest.  Often the providers of plan services do not fully disclose arrangements they have with mutual fund companies or provide rather murky disclosure of what they charge participants investing in the plan. 408(b)2 disclosure rules (effective 4/1/2012) should help with this.

However, as we discuss in our investment selection section low fees do not necessarily translate into superior performance.  Consistently superior performance net of fees it a truer measure of the value a fund provides participants in our view. 

Even if you embrace our point of view, however, many plans pay higher than necessary fees for what are very good performing underlying funds.  Most investment funds have different share classes and some of these classes levy higher fees than others.  The underlying fund itself is the same it's just the level of fees that change.  For example at American Funds an R1 share costs are roughly 1.25% higher than the cost of an R5 share.  Same fund - different cost structure.

Once you have found the funds you want to offer in the plan make sure the share class is appropriate for the plan and that you aren't paying more than necessary.  Over a period of twenty or thirty years an additional 1/2% per year in fees can reduce the ending value of a retirement account by many thousands of dollars. In fact, given a long enough time period, it could cut the value of your nest egg almost in half!  As these fees are asset based, the actual dollar amount paid in fees can increase each year as the value of your account increases.

High fees can reduce the value of even the best performing investments. 




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