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Monitoring Investments in Your 401(k) Plan

Most plan sponsors are aware of their fiduciary responsibility to monitor plan investments, either directly or through a committee they appoint, but knowing specifically how to do that can be challenging.  The best practice approach requires a combined process of using both investment analytics and non-technical processes to select and monitor investment managers or index funds. This approach can best be broken into three primary areas: Procedural process, asset allocation and on-going monitoring of analytics.

Procedural Process

Procedural process is the process fiduciaries use to select and monitor investments. As a fiduciary, you need to follow ERISA best practices in order to protect yourself and your company and ensure your plan is functioning well.  

In short, following best practices for a procedural plan requires: a written investment policy statement documenting the decision-making process, detailed minutes of each review, an accurate analysis from a qualified independent third party, and monitoring of quarterly reports to ensure they are directly tied to your investment policy. 

 
As a fiduciary, you should be able to analyze how your complete investment menu is working together to accomplish your plans’ purposes. When funds or managers are underperforming, you’re responsible for monitoring them and, if they don’t improve, replacing them. Simply adding additional funds in the same asset class isn’t the solution and often results in a sloppy process that sends mixed messages to participants. Proper procedural process allows you to follow an orderly and systematic process in maintaining your plan.

Asset Allocation

It is tempting to address ERISA’s 404(c) requirement permitting employees to direct investments in their own plans by simply offering a broad number of funds. The assumption is that by offering enough funds, fiduciary liability is mitigated. The problem with this thinking is that just offering a lot of funds does not ensure a broad range on the risk-reward spectrum.  Even though the average plan offers 12-14 funds, most plans don’t offer funds that range the different points on the risk-reward system.

 
The process of analyzing investments involves looking not only at how each fund lines up against a number of relevant metrics, but how different funds do or don’t fit together as part of a cohesive whole.  As a fiduciary, you want to construct an investment menu where the menu of choices is balanced, covers the risk-reward spectrum, and does not inadvertently tilt toward a particular asset-class exposure by offering multiple fund offerings in one or two asset classes.

Investment Analytics

Investment analytics are the best practice measures used to evaluate your plan on an ongoing basis. They should be tied directly to your investment policy and be done with varying frequency, but none of them alone should be absolutely determinative in deciding whether to replace an investment choice. Measures can be both qualitative and quantitative. 


Qualitative measures include regulatory oversight and organizational stability. Regulatory oversight means that to comply with ERISA regulations, each investment manager must be a regulated bank, insurance company, mutual fund organization or registered investment advisor. Organizational stability simply means there are no perceived organizational problems or significant legal issues with investment managers. Qualitative measures should be monitored on a continuous basis. 


Quantitative measures involve more complex analytics. They include analyzing asset allocation to see how an entire group of managers or funds work together as a whole, analyzing how the fund performance correlates with funds similar in style or peer group, evaluating the product’s risk-adjusted performance in comparison to similar plans, reviewing the funds track record and the amount of assets it manages, and comparing the funds expense ratio or manager’s fees with those of its peers. Most of these processes should be performed quarterly, though an analysis of asset allocation can be done annually.