Investment Menu Engineering & Monitoring
Selecting the right funds + constructing the right menu + keeping the right funds included = an art & a science.
A high-functioning 401k is multi-dimensional. Investments are a critical component but are just one component. We keep this in perspective & don’t allow it to overshadow and monopolize the process & distract from other important aspects of a high-functioning plan. It requires ongoing critical analysis and subjective judgment decisions laced with simple psychology, all consistent with Investment Policy Statement (IPS) & plan objectives. Sound like a lot? We're here to break it down:
Fund Menu Construction
At Encore 401k, we are all about compressing fund menus to help participants succeed. The theme “less is more” is a good starting point. Fewer and more thoughtful, easier to understand menus encourage greater participation and more appropriate selections, leading to better outcomes.
Some factors we consider when building an effective menu:
- Simple psychology *see compliance disclosures
- Strong Target Date Funds as the foundation
- Alternative defensive funds to weather down markets, not correlated to traditional stocks & bonds
- Re-labeling funds so they are easily understood and match their objective
- Broad mandates that provide complementary risk-return profiles, meaningful diversification and strong risk-adjusted results.
- Selecting specific asset class funds that are not highly correlated, as stand-alone funds, such as small-cap.
- A dividend-oriented fund that is more resilient in down markets
- A Global Fund with the objective to invest internationally as well as domestic.
- An International Fund with a broad strategy, that can invest in non-US developed markets as well as emerging markets.
- Fixed income options with a negative correlation to equities
- Stable Value that provide a guaranteed rate & term with reasonable exit and transfer provisions.
- Retirement Income Funds - an option for retiring employees who choose to keep their funds in the plan.
Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the difference.
— Robert Frost
Fund Evaluation & Monitoring
Consulting Services - 3(21)**
- Investment Policy Statement Preparation & Updating
- Non-Discretionary Investment Advice
- Investment Selection Services & Investment Menu Construction
- Investment Due Diligence Reviews.
- Investment Monitoring & Benchmarking
- Consulting services 3(21)**see compliance disclosures
- Default Investment Alternative Advice ***see compliance disclosures
- Initial & Specialized On-going Analysis of Stable Value Funds & Target Date Funds.
Management Services - 3(38)
- In addition to Consulting Services, as an option, at a Management Services level, we also offer “discretionary” services.
- Discretionary Management Services & Investment Selection Services - Continuous and ongoing supervision over the designated retirement plan assets.****see compliance disclosures
- Default Investment Alternative Management - develop and actively manage qualified default investment alternative(s)*****see compliance disclosures
Additional Investment Considerations
In addition to the obvious & important measures of overall results & cost, there are other measures & factors we pay close attention to when selecting & monitoring funds. Sometimes these are overlooked or downplayed. A few are listed below:
- Emphasis on patience & long-term results
- Sharp Ratios – risk-adjusted returns
- Upside & Downside capture ratios and Up & Down-Market % Ranking
- Correlation matrix
- Portfolio Manager structure & survivorship
- Investment company ownership, history, reputation & values
- Portfolio Manager ownership & tenure
- Target Date Funds – Glidepath analysis & equity style by vintage
- Special Resources to help educate & engage participants around investment fundamentals
DID YOU KNOW?
Target Date Funds (TDFs) are the biggest trend!
TDFs are the biggest trend and most important fiduciary decision with about 70% of participants investing in them. How did you select yours? How are you monitoring & benchmarking them? For help, give us a call at Encore - The 401k Repairman.
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BEAR v BULL Market?
Over the last 70 years, the AVERAGE BULL MARKET Total return was 265% lasting 67 Months. While the AVERAGE BEAR MARKET Total return was –33% lasting 13 Months. (Source - How long do recessions and bear markets last? - Recessions have been relatively small blips in economic history, The Capital Group, July 2022. ) Want to know more? Check out our Employee Education & Enrollment Services.