Last time, we discussed the components of an Investment Policy Statement (IPS), an essential element to any company retirement plan. A great deal of the IPS is centered on the plan’s investment lineup, or the investment options (funds) available to each participant in the plan. This is for good reason: your plan’s investment lineup not only plays a role in participant outcomes, but each fund plays a role in the overall cost of the plan to both the company and participants.
Due diligence should include:
- regulatory oversight;
- minimum track records for each fund;
- stability of the underlying organization (fund company);
- minimum asset size;
- holdings consistent with style;
- correlation to style or peer group;
- expense ratios and fees;
- performance relative to assumed risk;
- performance relative to a peer group;
- fund track records over 1, 3, 5, 10 year periods.
The plan’s IPS should clearly define the due diligence process used to select and replace any investments that don’t meet the standards outlined. This is a critical aspect of your IPS, but also toward meeting your fiduciary responsibility toward participants in the plan.