Ask the experts: (b)Lines

(b)est Practices: Plan-Level Investment Selection/De-Selection

By PS | March 28, 2014
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For example, some people will judge funds exclusively by their Morningstar ratings.  It’s a fine organization, but even it would encourage you to do a deeper dive.  A five-star fund could have just lost its long-time manager, or it could have just drifted into a new investment category, or it may have had asset inflows or redemptions that will impact future results.  Likewise, FI360 scores are a useful top-level screening tool, but it takes a deeper dive to make a prudent decision.

Weigh risk metrics (such as standard deviation and beta) as heavily as you weigh performance.  For example, a fund with a historic return of 10% may be less prudent to add (or retain) than a fund with a 9% record, if the 10% fund is much riskier.  Metrics such as alpha and Sharpe Ratio help to quantify risk-adjusted returns.

Fire a fund if you have lost confidence in it, but don’t pull the trigger too quickly if a fund meets most of your criteria but is just going through a slump.  There have been many instances where our patience has paid off, and there have been many instances where we have seen other fiduciaries ride a fund down and then fire a manager just before the “magic” returned. 

In summary:   Successful investment menu management is part art and part science.  There isn’t a single formula or black box that can do your job for you.  Investment performance is hugely impactful on long-term retirement saving results.  As a fiduciary, you owe it to your plan participants to do an excellent job on their behalf, pulling in whatever resources you need in the process.

 

Jim Phillips, President of Retirement Resources, has been in the investment industry for more than 35 years, the past 18 of which have been focused in the area of qualified retirement plans.  Jim worked for major national investment firms for 14 years before “going independent” in 1990.  Jim is an Accredited Investment Fiduciary, has contributed to two books on 401(k), and his articles have been published in Defined Contribution Insights, PLANSPONSOR’s (b)lines and ASPPA’s 403(b) Advisor, and Jim is a RetireMentor on MarketWatch.com. His work has been acknowledged with multiple Signature Awards from the PSCA, he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisers, by PLANADVISER Magazine, and he was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award. Jim has been a frequent speaker at national conferences, including SPARK, ASPPA, AAO and the PLANSPONSOR and PLANADVISER National Conferences.

Patrick McGinn, CFA, Vice President of Retirement Resources, is a CFA charterholder and has been in the securities industry since 1993. In addition to the Chartered Financial Analyst designation, he is an Accredited Investment Fiduciary and a member of the Boston Security Analyst Society. Together with Jim, Patrick has co-authored a number of articles which have been published in industry publications on topics about managing successful 401(k) and 403(b) plans. His work has been acknowledged with multiple Signature Awards from the PSCA, and he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisors, by PLANADVISER Magazine. He was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award.

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.  

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