Many employers face similar concerns with their retirement plans. They want to improve their plan to attract and retain key personnel, lower overall costs, and feel confident that their program contains an appropriate and competitive investment lineup. Addressing these critical steps and considerations is crucial when creating the right lineup for your retirement plan

Creating an Investment Policy Statement

Many experts and financial professionals agree that creating an Investment Policy Statement (IPS) is one of the most important first steps a plan fiduciary can take to move forward with a successful plan. An IPS helps guide the decisions the sponsor’s retirement plan committee and provider make regarding the investment options.

A retirement plan consulting firm can work with your committee to create an IPS and then communicate the guidelines to participants to help them understand why you chose certain investment options. Maintaining an up-to-date IPS helps ensure sponsors follow a prudent process for selecting investment options for the plan and evaluating their progression.

Determine the Right Balance of Funds

Because each person has unique investment goals, a retirement plan’s funds should be diverse. A lineup shouldn’t solely include active funds or passive funds, but should instead feature both. Active and passive management funds complement each other and allow investors to build a diverse portfolio. When choosing funds, you may want to review each fund’s investment philosophy, its competitive advantage, and how they may perform in different market conditions.

Beyond types of funds, you’ll want to determine the number of funds to offer. You want to provide several so your participants can have a diversified portfolio. However, too many options can overwhelm your employees and may discourage them from participating at all. The average 401(k) plan offers 20 investment choices, but many financial experts believe this may be too many. There’s no one right answer, but you may want to avoid surpassing this average.

Be Diligent with Target Date Funds

More than 70% of 401(k) plans include a suite of target date funds. Considered a “set-it-and-forget-it” investment option, some investors choose this as a default so they can avoid having to rebalance and update their portfolio allocations over time. While offering these funds can encourage more employees to participate in a plan, there are some considerations to make.

For one, target date funds can cost more than other funds because they’re known for their long horizons. Secondly, target date funds — which investors choose based on their desired retirement year — can be more aggressive or more conservative than expected. During the 2008 financial crisis, many investors with 2010 target date funds suffered severe losses because they didn’t realize their portfolio was invested in more stocks than they thought.

When evaluating your target date fund options, make sure you compare the fees of several companies, as opposed to settling for the record keeper’s proprietary product or choosing the one with the lowest fees.

Use a QDIA Safe Harbor Option

When choosing your plan’s lineup, you’ll have to decide between choosing a QDIA (Qualified Default Investment Alternative) or a non-QDIA investment as the default investment for your plan participants. QDIAs are a safe harbor option developed by the Pension Protection Act of 2006. QDIAs are usually associated with automatic enrollment, but they can be applied to any participant enrolled in the plan who has not confirmed their investment choices.

We recommend using one of the QDIA safe harbor options. The QDIA regulation provides sponsors legal protection from fiduciary liability for investment outcomes under its safe harbor terms. Additionally, the factors of a QDIA often make sense for participants, resulting in diverse investment options and increased participation. Just remember, a QDIA provides fiduciary protection for default investments, but you are still responsible for selecting and monitoring the QDIA.

Creating Your Lineup

As a plan sponsor, you must justify your investment lineup using a fiduciary process for investment selection and monitoring. If you are relying on your vendor or broker who is serving in a non-fiduciary capacity for this function, you are accepting risk and liability. By working with us, you receive the benefit of a third-party, unbiased verification of your investment lineup.

If you seek guidance regarding your plan options, we’d be happy to assist you and help you review your many responsibilities as a plan sponsor. Give our office a call at (949) 718-1600 or email us at info@bpadvisors.com.

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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