Employer Investment Decisions: Any Affect on Performance?

In a recent article from the Center for Retirement Research at Boston College, the authors further validated what is commonly accepted as fact in the 401(k) industry: participants routinely chase performance and subsequently underperform most basic investment strategies (buy and hold and 1/N rule, for example).  Nothing really new here, but good to know that prevailing thought is once again substantiated.   

More importantly, the article explored investment decisions made at the plan level, seemingly by the Plan Administrator, which offered a different perspective on the “investment decisions” debate.  In their research on plan level investment decisions, the authors focused on plan fund performance versus comparable indexes/randomly selected funds (in the same asset class), as well as whether or not fund additions and replacements added value.  The results mirror the same outcome we typically observe at the participant level: like their employees, employers do not improve investment performance through their fund selection and retention decisions.  For specific details of the study’s results, see the entire article here: How Do Employers' 401(k) Mutual Fund Selections Affect Performance?                 

It’s fair to say that when monitoring potential investments, fiduciaries are confronted with an overwhelming amount of information and are often faced with the burden of interpreting conflicting statistics.  One idea that has been gaining traction for employers is to outsource (i.e., allocate) specific duties to others such as a discretionary investment manager or a discretionary corporate trustee.  Discretionary corporate trustees, as independent fiduciaries, relieve the employer of making investment decisions.  Further, they provide their clients with a systematic method for selecting, monitoring and replacing plan investments if needed.