Fiduciaries and business owners already take on enough risk elsewhere. In an environment that allows government protection by following a series of procedures and practicing due diligence, it makes no sense to place fiduciariesat added risk.Plan sponsors should review their investment-policy statement for a quantitative approach to investment monitoring. A good rule of thumb is: If you can explain to a novice the criteria of “how and when” a fund is placed on a watch list, removed or replaced, your work is done.
The formula should be simple: for example, a scorecard of each investment based on distinct and unique criteria, including peer group comparisons of:
* Risk-adjusted performance;
* Performance consistency; and
* Fund manager value-add.
Every quarter, the figures are formulated and the outcome is clear: A fund passes or fails. The removal of qualitative factors to skew the decision makes the process more meaningful and effective.
The worst investments decisions are based on emotions. Removing emotion from the equation provides added protection from risk for plan fiduciaries, whatever external factors might make the markets swoon.
When you are sponsoring a qualified retirement plan for your employees a prudent process is essential. Following this prudent process will reduce your fiduciary risk as well as provide your employees with the best plan possible for your firm.
Please comment or call to discuss how this affects your company.
- The Use of ERISA § 3(38) Investment Managers in Defined Contribution Plans (401kplanadvisors.com)
- Why Should 401k Plan Sponsors Care What Others Think About the Fiduciary Standard? (401kplanadvisors.com)
- Top 10 Hidden Liability Pitfalls That Retirement Plan Fiduciaries Should Avoid (401kplanadvisors.com)