By Greg Farrall, PPC®, CWS®, CPFA®
As a sponsor of an employee retirement plan, you have a duty to assess investment options on an ongoing basis to ensure they are in line with your participants’ best interests. Not only that, but keeping your plan compliant requires you to replace poor performing investment options in a timely manner.
With such a huge responsibility, it can be overwhelming to navigate the investment landscape of an employer-sponsored retirement plan. At Farrall Wealth Stewards, we recognize the challenges plan sponsors face, which is why we put together this investment guide. Here are four signs it may be time to add or replace investment options in your company’s retirement plan.
1. Similar Plans Have Lower Fees
One of the first signs that it may be time to update your investment options is if you start to see similar plans with lower fees. This can indicate that your participants are overpaying for their investments and, if left unchecked, it can put you in violation of your fiduciary duty. You don’t have to offer the lowest fees, but you do have to have reasonable fees that are considered fair for what you’re offering.
Thankfully, reviewing your fees has become easier than ever, especially if you work with a qualified financial professional who can help you sort through the details. When comparing fees, however, it’s crucial to make sure you are looking at similar plans.
For instance, you cannot compare an actively managed fund to a passively managed fund and expect no difference in fees. These are much different investment vehicles and they will have drastically different fee structures. Be sure the plans you are comparing are similar in nature.
2. There Have Been Major Changes to the Investment Structure
Like everything, investments change over time, and the investments offered as part of an employer-sponsored retirement plan are no different. This means that what may have been a well-suited investment option for your plan originally can become inconsistent with your investment policy statement over time.
Maybe that fund is now owned by a different investment firm, or is investing in a way that no longer aligns with your plan’s needs. Or perhaps the fund has stayed the same but you have decided to offer DEI or ESG investments to your participants.
No matter what the situation, regularly reviewing the structure, investment philosophy, and holdings of the funds you offer is an important part of being a plan sponsor. If an investment option no longer fulfills the role it needs to, it may be time to reconsider your choice.
3. Long-Term Performance Has Been Poor
This may be the most obvious sign, but if an investment offering has been consistently underperforming based on the appropriate benchmarks, then it could be time to replace it. Keep in mind that no investment will perform perfectly 100% of the time. There are natural ebbs and flows to the market that make it impossible to be in the green at all times. But if you notice a particular investment is always in the red, or seems to drop significantly more than the other investment choices, you may want to consider updating your selection.
Though important, investments should not be judged on performance alone. You should also consider the role it plays in the overall offering. For instance, maybe it’s not performing as well as the other funds in your plan, but it acts as a counterbalance to volatility because it has a low beta (or correlation) with the stock market.
You can also look at other financial metrics like the Sharpe Ratio to judge a fund’s performance against other investment options. Keep in mind that these comparisons should always be done over the long term to avoid making hasty decisions based on day-to-day market fluctuations.
4. Plan Participants Have Made Negative Comments
In addition to information you gather yourself, you should also pay attention to feedback received from plan participants, with special attention given to any complaints made. As a fiduciary in charge of handling your employees’ hard-earned retirement assets, it is important to consider if plan participants are unhappy with the investment offerings available.
Though your decision to update your selection shouldn’t be made based on participant complaints alone, they could be helpful in identifying the true needs of your participants and how to structure your plan in a way that meets those needs. After all, a retirement plan is supposed to be for the participants’ benefit.
Does Your Employer-Sponsored Retirement Plan Need Updating?
Updating your investment options is a natural part of the plan sponsorship process, but it can get overwhelming without proper guidance. At Farrall Wealth Stewards, we strive to help small business plan administrators make informed decisions about their investment offerings. If you would like to learn more about how we can help, or if you would like to review your current investment selections, we would love to hear from you! Please reach out to us at Farrall Wealth Stewards to get started today.
Greg Farrall is CEO and owner of Farrall Wealth, an independent, boutique wealth management firm that is dedicated to helping women and business owners create customized financial plans that allow them to grow, protect, preserve, and distribute their wealth. Greg is known for being a problem-solver who walks his clients through whatever life throws at them. He prioritizes building long-term relationships and is passionate about going the extra mile for his clients so they can pursue their goals and live the lives they want. Greg has a bachelor’s degree in international business from the University of Wollongong in Australia and a bachelor’s degree in finance and marketing from Indiana University Bloomington. He is a Professional Plan Consultant® (PPC®) and a Certified Wealth Strategist® (CWS®) professional. And he recently received his Certified Plan Fiduciary Advisor (CPFA®) designation. You can listen to him on his financial literacy and business topic podcast, Money Matters With Greg, on iTunes, Google, and Spotify. He’s also on YouTube, Twitter, and Facebook at @FarrallWealth.
Greg is a pillar of his community and served as the 2013-14 co-chair for the United Way campaign, through which he helped raise $1.8 million for 38 nonprofit organizations across Porter County, Indiana. He also served as president of the Valparaiso Rotary Club. Currently, he is on the advisory board for the Kelley School of Business and Dean of Students’ board at Indiana University. He also holds a position on the Culver Academies parents’ board.
When he is not working, you can find Greg spending time with his family or investing in one of his many passions, which include cooking, Spartan races, fly fishing, and meditation. To learn more about Greg, connect with him on LinkedIn.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
This information was developed as a general guide to educate plan sponsors, but is not intended to be authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does an advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
The Sharpe ratio is a risk-adjusted measure of the excess return (or Risk Premium) per unit of risk in an investment asset or a trading strategy.