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As a plan administrator, how much Fiduciary responsibility do I have above and beyond obtaining a plan financial adviser and following their recommendations?

I see many of the funds in our plan under performing in relation to index (based on the financial adviser's quarterly performance reports) and yet the adviser says that the funds are not under watch (based on some complicated metrics).

I'm wondering if I'm right to question the funds overall performance when I see it only averaging a 4% return when the market seems to be much stronger.

Jul 08, 2013 by Angela from Portland, OR in  |  Flag
6 Answers  |  8 Followers
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Document the process. Performing the steps alone is not enough to protect you. One strategy is to list out benefits your participants enjoy outside of what other plans offer. This helps make comparisons to other plans more of an "apples to oranges" and makes it much less likely to be successfully sued. Finally, plan comparisons should be run through the "401k Averages" publication tool. You may find you are paying way too much relative to your peers.

Comment   |  Flag   |  Jul 09, 2013 from Everett, WA

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Angela,

As the plan administrator (and maybe the sponsor) you have quite a bit of fiduciary responsibility and liability. You can delegate that responsibility to a competent professional and thus transfer the liability to them. You will always retain the responsibility to monitor the professional to ensure your decision to employ the professional is still reasonable.

I would like to complement you for knowing enough to even ask the question and for your interest in your plan. Unfortunately, it is rare to find this much knowledge and interest.

I can't speak to the performance of your funds but it is encouraging that your advisor is using some type of documented, disclosed system for monitoring the investment options. The metrics you mention in your comments are quite common and reasonable to use.

I think a good next step is to ask your advisor to spend some time helping you understand the ranking system so that you will feel more comfortable with their advice.

Good luck and give yourself a serious pat on the back!

Barry

1 Comment   |  Flag   |  Jul 08, 2013 from Kingsport, TN
Angela

Thanks very much for the answer, I appreciate it!

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Flag |  Jul 09, 2013 near Portland, OR

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Angela,

It is the fiduciary responsibility of the Plan Sponsor to always know, understand and monitor the activities of all hired service providers, not just to follow them. You are always right to question any component of the operation of the plan; especially ones you do not feel are in line with your expectation. No matter what “complicated metrics” are being used to monitor the investments of your plan; it is your responsibility to understand them, and therefore the responsibility of your Investment Advisor to educate you on them, to your level of satisfaction. As previously referenced in other answers, the plan’s Investment Policy Statement (IPS) should contain the criteria to which your investments are being monitored. Just because a fund is not meeting all of the criteria does not necessitate action, but you should have enough information in the reports to answer the simple question of “Why?”.

You are taking the first step in fulfilling your fiduciary responsibility by asking the right questions.

David

1 Comment   |  Flag   |  Jul 08, 2013 from Uniontown, OH
Angela

Thanks!

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Flag |  Jul 09, 2013 near Portland, OR

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Hi Angela,

I would be interested to know the complicated metrics the adviser is using.

As for your fiduciary responsibility, I don't know what your role is, but depending upon your relationship and agreement with the adviser, it is unlikely that that adviser has a larger fiduciary obligation that you do (if you are the Plan Administrator).

Please let me know if you have any further questions.

Mike

3 Comments   |  Flag   |  Jul 08, 2013 from Apex, NC
Angela

Thanks for your reply. There are quite a few metrics, they are things like: Gross Exp Ratio, Alpha, Sharpe Ration, Turnover Ration, Style Drift and many more. All compiled to a "score" which is used to pass, watch or fail the individual offerings.

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Flag |  Jul 08, 2013 near Portland, OR
Angela

Oops those are "Ratio" not "ration"

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Flag |  Jul 08, 2013 near Portland, OR
Michael Kothakota, CFP®, AFC®, CDFA™

Angela, those are all valid metrics, although "score" you mention concerns me. I would listen to what Curt is saying (Below) as well as Barry. In addition, if you are looking for performance analysis, I would see if you can find someone near you who has a CIPM designation. They will likely understand more about performance reporting and return analysis than your adviser. Further, I would say you might want to check what benchmarks this adviser is using. Without knowing the full details, it is difficult to make an assessment.

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Flag |  Jul 08, 2013 near Apex, NC

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1 vote

Angela,

If this is an employee directed account (401(k)) there is a safe harbor for the Plan Sponsor (not sure if that is your role or not) under Section 404(c) that protects the Sponsor if the plan offers the right selection of funds and the sponsor informs the employees of the intent to take advantage of the safe harbor among other things.

If your plan is not employee directed, you can delegate investment selection to a competent professional.

While you are right to be interested in returns, I would be more concerned about the documentation of the plan. Is there an Investment Policy Statement? That should outline who the fiduciaries are and what responsibilities they have.

Bottom line though is that the plan sponsor can never fully remove fiduciary responsibilities.

Hope this helps.

Curt

2 Comments   |  Flag   |  Jul 08, 2013 from Alexandria, VA
Angela

Hi Curt, yes it's a 401(k) and I'll check into the investment police statement as I'm not sure I've ever seen that. Thanks!

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Flag |  Jul 08, 2013 near Portland, OR
Curt Sheldon, CFP®, EA, AIF®

Investment Policy Statements are less common in 401(k) plans, but they can exist and probably aren't a bad idea. Based on what you said above it sounds like your advisor is using a Fiduciary Score developed by FI 360 or something similar.

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Flag |  Jul 08, 2013 near Alexandria, VA

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1 vote

Angela,

I certainly think that you are well served to be watchful. Good job in paying attention to this, as many employers to not.

However, it is also important to keep in mind that a qualified retirement plan is best served with funds which adequately represent all of the asset classes necessary to build portfolios of multiple risk tolerances as well as multiple investment objectives. Many of your employees may be very conservative investors, while others may have a high risk tolerance and many years to achieve their goals.

You mentioned that the funds are underperforming compared to "the index." But you did not specify which "index" you are talking about.

Each portfolio component should typically be expected to perform equal to ITS OWN index - minus fees. For active funds which seek to beat their index, some fund managers will occasionally outperform their index - but that is usually "hit and miss" and often involves a great deal of luck. According to the S&P Index vs. Active Manager report (SPIVA) - approximately 86% of all funds which outperform their index significantly - go on to UNDERPERFORM their index over the next 5 years. So predicting which fund may outperform is both an art and a science. Some investment advisors are good at picking funds and some are not - thus the complicated metrics associated with picking funds. Many advisors simply "index" the asset classes - choosing the lowest cost funds which seek to merely match the index (minus fees) so they are guaranteed to do at least "average" in most market conditions. Others seek to "beat the market" which involves a great deal of guesswork and due-diligence. Others (like myself) will use a blend - using index funds for core holdings and active, opportunistic managers for sector bets as the economic conditions make themselves known to us.

That being said - if you are using "the market" - and I assume that you mean the S&P500 - then ALL of the following funds will have UNDERPERFORMED over the last several years:

ALL bond funds of all types.
All International Funds All Emerging market Funds All commodity (gold) funds All Large - Cap Value Funds Most Small Cap and Small Cap Value Funds All "Lifestyle" funds

Over the last year or so, many bond funds may have even lost value slightly even though "the market" - the S&P which is ONLY Large Cap Core stocks - have done very well. This is because the bond funds are invested in bonds and yields have been very, very low. Recently Fed comments caused a painful ripple in the bond markets which caused most bond funds to lose several percentage points in value.

In my opinion, one of the best ways to evaluate the holdings of a retirement plan is not only to use the "metrics" which include fees, account turnover, manager tenure, etc - but you also have to evaluate each fund's risk-adjusted performance in comparison to its individual index.

For example - Bond Funds should be compared to the Barclay's Aggregate Bond Index. What is its Sharpe Ratio and its Alpha Rating? Anything above 1 is excellent.

Large Cap "Blend" or "Core" funds should be compared to the S&P500 or the Russell 1000 index. Large Cap Value should be compared to the Russell 1000 Value Index. Emerging Markets should be compared to the MSCI Emerging Markets Index. Lifestyle funds should be compared to the Morningstar Aggressive Allocation Index, the Morningstar Moderate Allocation Index, or the Morningstar Conservative Allocation Index, depending upon their specific objective.

Again - each fund's Sharpe Ratio an Alpha Ratio (also known as the Jensen Factor) will give insights as to whether or not the fund managers have been effective at beating the market, while controlling risk, if that is their goal.

My point is that not ALL asset classes have done well recently - but "the market," meaning the DOW and the S&P500, have. Only funds that are designed to mimic the S&P500 should be compared to the S&P500. Every other fund should be compared with their OWN index.

The reason for this is that at some point - the S&P500 will NOT do well - and your employees MUST have other asset classes in their portfolios (or at least available for investment) in which to invest. As a fiduciary, you are responsible for giving them acceptable options - NOT for giving them only an investment that matches or beats the S&P500 during the few periods of time in which the S&P500 is actually the "best" investment.

So my recommendation is that you sit with your financial advisor and ask specifically how they are evaluating each fund. As others have mentioned - the investment policy statement is a great place to start. If you are interested - contact me on my website and I will e-mail you our investment policy statement. While we do NOT serve as fiduciaries for retirement plans (so this is not an attempt to garner business) - our investment policy statement may provide you some insight as to what a properly designed policy statement might look like.

Thank you for caring about your employees. Many employers do not monitor their retirement plans, and their employees suffer as a result. You are to be commended for your diligence and effort.

Jon Castle MSFS, CFP Chief Investment Officer PARAGON Wealth Strategies http://www.WealthGuards.com

1 Comment   |  Flag   |  Jul 08, 2013 from Jacksonville, FL
Angela

Thank you very much for your reply. Lots of great info for me to read here!

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Flag |  Jul 09, 2013 near Portland, OR

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