PSNC 2013: Lower-Cost Investing

June 11, 2013 ( - Taking a look at your investment options and management style, is passive management or index investing right for you?

Whether a plan sponsor selects actively managed funds or passively managed funds, one issue agreed upon by panelists at the Lower Cost Investing session at the 2013 PLANSPONSOR National Conference, is that having a well-documented process as to how and why you choose a particular fund is essential. A major influence on why most plan sponsors should be offering index funds are the class action fee litigation suits over the past few years. Attila T. Toth, partner, co-founder, Portfolio Evaluations, Inc., said that among the suits filed regarding alleged 401(k) fee violations, the firm of  Schlichter, Bogard, & Denton also looked into how higher cost actively managed funds were underperforming the index funds— and the committees had a difficult time explaining that.

“We’ve been advocates of offering index funds through 401(k) plans for several years. The structure that we have embraced seems to be best practice today—offering different tiers of investments to participants. We typically offer target-date funds (TDF), asset allocation funds, or balanced funds, as tier one and the QDIA.  Tier two is an index tier with possible global representation using index funds, and tier three are your actively managed funds,” Toth said. To emphasize the trend in index funds, Toth added that one year ago Charles Schwab, a large 401(k) vendor, began promoting a suite of only index funds that has been picked by some very large plan sponsors. 

When discussing whether having cheaper funds is better, Jim Phillips, President of Retirement Resources, says plan sponsors always need to assess value. Are you getting something in return for everything you are paying for? “We use one fund that has 5 basis points and we also have index funds in other plans that have expense ratios as much 60-70 basis points, because there is revenue sharing built in to help offset the expenses.  It’s multidimensional. It’s not that index funds are cheap and good, and active funds are expensive and they are not, we find that it’s valuable to be able to market to all employees.” Ideally a plan can have some active and some passive funds—it does not necessarily have to be an either/or situation.

But choosing a passive fund, is not a passive decision for Jim Marx, director, retirement plans division, Edelman Financial Services LLC. “We look at between 19 and 21 different asset classes. For each asset class we have a five factor model. We consider expenses, diversification, liquidity, risk of adjusted returns, turn over and tracking errors.”

Understanding your participant’s demographics and how much volatility they can tolerate, covering all risks, is key—however the goal is accomplished.


Judy Faust Hartnett