Researchers from The Center for Retirement Research at Boston College found1 administrator’s investment menu decisions were not improving performance. Like the average investor they too were chasing returns (see Warning: Investing on Past Results May be Hazardous to You Wealth.) While the warning label is prominently displayed, it seems rarely heeded by 401k investors and the 401k fiduciaries that select their investment menus.
401k Investment Menu Changes Improving Portfolios or Chasing Returns?
The researchers concluded that the investments added by the employer’s 401(k) administrators select achieved investment returns that are worse than comparable indexes. The Certified Financial Planner Board says that investment returns should be compared to an appropriate benchmark, such as the S & P 500 or Aggregate Bond Index. Given this is the case, have you looked into investment strategies for your employees that replicate a given indes? Are you working with fiduciary investment advisors and managers that select appropriate indices?
It appears that the employees pick-up on how their investment fiduciaries select investments. They tend to chase returns and transfer assets into higher-performing investments. How do you communicate investment menu changes to your participants? Are your plan fiduciaries engaged in chasing investment performance behavior when they invest as a participant?
Modern Finance Principles, developed in academia and not Wall Street, teaches that some investment categories will unpredictably do better than others over time. This strongly suggests over the long term participants are better off focusing on managing the balance of their investments rather than chasing returns.
Why should a 401k fiduciary take care with the investment menu?
Whether you provide your 401k as recruiting and retention tool or a paternal, meaningful retirement benefit, you have a legal Duty of Loyalty and a Duty of Care. These results suggest that most participants’ decisions do not add value to their investment performance. This emphasizes the importance of the choices made by the plan fiduciary. This research suggests:
- Working with provides that Using the Global Processes of The Center for Fiduciary Studies
- Providing participants with model portfolios created by ERISA 3 (38) investment managers that take on the risk of selection and monitoring of investment menus
- Develop and Coordinate Participant Enrollment and Communication Program to Answer Participant Questions and Increase Engagement2
- Provide Investment Education and Retirement Income Information to Plan Participants2
- Why take on risk for non-core business functions where the risk/reward is completely out of whack (Google 401k lawsuits)?
- Why not get yourself the “qualified” help you need to make decisions to help your employees and reduce your business and personal risk?
- Why not get your employees help for their retirement readiness?
What providers share in your personal fiduciary risk today?
Why not use providers that take on your work, share in your risk, ERISA 3(21) investment advisor, ERISA 3 (38) investment manager, etc. Ask your current providers if they are acting in the best interest (fiduciary) of you or your employees. If you are unsure of the contract language, have an attorney that specializes in ERISA read the contract. To help your employees and you, does your advisor have access to the Employee Engagement, Education and Transition Services LPL Financial’s Worksite Solutions?
1How Do Employers’ 401(K) Mutual Fund Selections Affect Performance?
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI.