Monitoring the investment options in your plan is a fiduciary responsibility under ERISA (the Employee Retirement Income Security Act of 1974). For those managing 401(k) or similar plans, conducting regular reviews of the investment lineup helps ensure that it meets performance expectations, is reasonably priced, and aligns with your participants’ needs.
Failure to regularly review investment options may result in underperformance, increased fees, participant dissatisfaction, and heightened scrutiny from the Department of Labor (DOL). Therefore, it is essential to maintain a well-documented and systematic evaluation process.
Why It Matters
- Performance: You want to make sure your investment options deliver reasonable returns for the level of risk involved.
- Compliance: ERISA requires fiduciaries to monitor and select investments with care and diligence.
- Participant Satisfaction: A well-structured lineup helps participants feel confident and engaged in their retirement planning.
- Risk Mitigation: Identifying issues like high fees or poor performance early can help you avoid bigger problems down the road.
Key Investment Evaluation Factors
- Performance Metrics: Evaluate returns across multiple time frames while taking into account both volatility and consistency.
- Fee Structures: Review expense ratios and administration fees to ensure costs are reasonable under ERISA’s 408(b)(2) rules.
- Diversification: Ensure that your portfolio comprises a well-balanced selection of asset classes to accommodate varying risk profiles.
- Benchmarks: Compare funds to relevant indices (e.g., S&P 500 for large-cap funds) and peer averages.
- Participant Feedback: Gather information through surveys or usage data to help identify participant preferences and areas for improvement.
Your Action Plan
- Establish a Review Schedule: Set a regular quarterly or annual review of investments performance with flexibility for ad-hoc reviews if major changes occur in the market or fund management.
- Benchmark Performance: Use available tools or advisor reports to assess each fund in relation to benchmarks and peers. This helps you identify performance levels and supports decision-making.
- Assess Fees and Costs: Review all fees for fairness and transparency as high costs can reduce participant returns over time.
- Safeguard Diversification and Suitability: Review the overall lineup to confirm it’s diversified and matches your participant needs, in line with your investment policy statement.
- Make Adjustments and Document Everything: If a fund isn’t meeting expectations, take action, and consistently document your decisions and reasoning for fiduciary due diligence.
Final Thoughts
ERISA requires strict fiduciary standards. Regularly evaluating your plan’s investment options is one of the most effective ways to meet that standard while helping participants build a stronger financial future.
Now is a good time to review your investment lineup. A well-documented process not only keeps you compliant, but it also builds trust and confidence with your participants.
For any questions or if you’d like to discuss your plan’s investment strategy, feel free to reach out to me at sahsan@mjlm.com.
Stay tuned for more tips to keep your EBP in top shape!
