Evaluating Mutual Funds: Performance is Just One Piece of the Puzzle
By Kevin Drever, Member, ADP Strategic Plan Services and Institutional Investment Consultant*
Choosing the right mutual funds for a retirement plan requires time and research to make appropriate (and compliant) selections. By delegating this responsibility to an investment manager, plan sponsors gain peace of mind knowing that professionals are overseeing your plan and protecting you from potential liability.
Retirement plan sponsors understand the importance of making informed decisions when it comes to their employees' financial health. Offering a range of mutual funds or investment vehicles through a retirement plan is a way for employees to save for retirement while giving them the opportunity to diversify. However, a plan sponsor's challenge, with so many investment options to choose from, lies in selecting the right mutual funds for a broad range of employees - this task requires careful consideration.
As a plan sponsor and fiduciary, how do you know you're choosing appropriate investment options that will meet your company's goals and fulfill your fiduciary obligations?
An investment advisor can offer investment recommendations, but the final decision is ultimately yours as the plan sponsor. An investment manager, on the other hand, is tasked with choosing and monitoring the investment options in your retirement plan, keeping your plan's best interests in mind, and protecting you and your organization from liability.
Performance isn't everything.
Understanding the behind-the-scenes work of investment managers is essential for plan sponsors and fiduciaries. Without question, investment performance is a key factor in fund selection. At the same time, an investment manager will weigh a fund's short-term performance issues against their views about its ability to perform well over multiple market cycles.
But an investment manager's role doesn't stop there. Their holistic approach to fund evaluation is what makes their services so valuable:
Fees and expenses
What's the total cost of investing in a particular mutual fund? High fees can erode investment returns over time. By comparing fees and expenses across different funds, an investment manager can provide you with a favorable balance between performance and cost.
Varying risk levels
Risk considerations play a significant role in evaluating a mutual fund. Does it align with your organization's overall investment strategy? Factors such as a fund's asset allocation, investment style and historical volatility are carefully vetted to ensure it fits within the desired risk parameters of your plan.
Suitability
How knowledgeable are your plan participants about investments? What are their income levels and tolerance for risk? An investment manager will analyze the fund's investment objectives, fees, and appropriateness for your employee base to ensure it's a smart investment option. They'll also assess a fund's quarterly and annual results in relation to its peers and a broad benchmark for increased clarity.
Knowledge is power when it comes to investing for retirement plans.
Investment managers often have access to information that plan sponsors aren't privy to — like speaking directly to fund managers. So, they likely have more pertinent facts on which to base their decisions.
Additionally, most investment managers will provide you advance notice of any changes that will impact your investment lineup.
ADP Strategic Plan Services (SPS) provides our retirement plan clients with investment services that help them effectively manage their investment fiduciary obligations, gain access to a diverse group of funds, and offer plan participants a diversified fund menu to help them make progress on their retirement savings goals.
Learn how we can contribute toward your participants' retirement readiness.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor. M-497962-2024-02-12
*Registered representative of ADP Broker Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 and Associated person of ADP Strategic Plan Services, LLC (SPS) an SEC Registered Investment Adviser. Registration does not imply a certain level of skill or services.
