Investment Menus: What to Expect from Your Retirement Plan Investment Advisor
As a plan sponsor, one of your most important (and obvious) responsibilities is ensuring your organization's retirement plan has proper investment oversight. But how do you know if your investment advisor is delivering the services you should expect? At Retirement Plantology, we're often asked this question by prospective clients who want to evaluate their current advisor's performance. We’ve outlined the key functions as well as possible red flags.
Key Functions of a Retirement Plan Investment Advisor
Development of an Investment Policy Statement (IPS)
Your investment advisor should create and regularly update an Investment Policy Statement that defines the criteria for selecting and monitoring investments. This document guides the entire fund menu design process and should be reviewed annually to ensure it remains aligned with your plan's objectives. This document serves as both a map and a GPS, clearly defining the overarching goals and objectives of the plan, the quantitative and qualitative standards for choosing and overseeing investments, and, when done right, it can help limit fiduciary liability. It also fosters consistency in investment decisions and establishes clear expectations for investment performance. While the Employee Retirement Income Security Act (ERISA) doesn't mandate a formal IPS, it does stipulate that fiduciaries have a well-articulated and documented procedure for investment selection and ongoing evaluation, effectively highlighting the best practice of having an IPS in place.
Fund Selection and Due Diligence
A quality advisor thoroughly researches potential investment options, considering factors like performance history, expense ratios, risk profiles, investment style, manager tenure, and importantly, how each investment complements the overall lineup.
Portfolio Diversification
While technically only three materially different investment options are required (stocks, bonds, cash), a well-designed fund menu offers diverse investment classes that allow participants at any career stage to build balanced portfolios tailored to their needs. Advisors will help with what types of investments should be included and how in order to help employees build a diversified portfolio. An example would be selecting either an international equity fund that has exposure to emerging markets or one without and a separate emerging markets fund.
Ongoing Monitoring
This is where many advisors fall short. Your advisor should establish a regular process for monitoring fund performance and identifying underperforming or unsuitable options. This usually translates to a meeting or a write-up that the retirement plan committee reviews with the advisor. This isn't a "set it and forget it" situation—it requires continuous attention and documentation. We've encountered issues with new clients who lack reports or any evidence of investment evaluation. This is not how you demonstrate thoughtful and prudent oversight of your plan!
Fiduciary Responsibility
Your investment advisor should act as a fiduciary, with a legal obligation to act in the best interest of plan participants. Make sure you understand what level of fiduciary coverage your advisor provides—whether they're a co-fiduciary or a discretionary fiduciary. See our blog post on the differences and what you should expect from your advisor in helping to mitigate your liability as the plan sponsor.
Participant Education
Your advisor should help provide education materials that help participants understand the investment menu and make informed decisions about their portfolios, keeping your specific employee demographics in mind. It’s very important to consider who your employees are, not just in the design of the choices that are offered on the investment menu, but also for helping them make wise investment decisions. Different populations have different needs, both for do-it-for-me options as well as the level of investment experience/savviness they have.
Benchmark and Performance Evaluation
Establishing appropriate benchmarks is essential for evaluating investment performance. Your advisor should be able to explain why certain investments are performing as they are, putting market conditions into context. Managing expectations is key in today’s fast-paced reporting environment. Without careful consideration and following due process in the IPS, it might be tempting for committees to make hasty decisions or miss the broader market trends amidst the daily noise. Appropriate benchmarks and relevant peer groups are essential for evaluation. The advisor needs to be able to explain if an investment is doing well in two ways:
Is it meeting its own basic goal (like keeping pace with the overall market for that type of asset)? (That's the benchmark.)
Is it doing better, worse, or about the same as similar investments? (That's the peer group comparison.)
Fee Analysis and Transparency
Your advisor should ensure you have the right share classes in your plan with transparent fee structures. This includes a detailed analysis of expense ratios and revenue sharing to prevent hidden costs that could expose your plan to risk. We won’t go into a lengthy explanation, but this feeds into the overall cost of the plan and how it is paid. When constructing and monitoring the investments, the share classes or investment types (CIT, revenue sharing, institutional, etc) will play an integral part. For example, an employee called a plan sponsor about some “surprise fees” on their statement. This occurred because the advisor/plan sponsor made changes to the investment lineup, but the plan’s cost construct and employee communication were never considered.
Default Investment Fund Analysis
If your plan uses target date funds as the default investment (as most do), your advisor should analyze the glide path and underlying investments to ensure they align with your employee demographics and plan objectives. With so many options available and now with some incorporating benefits like lifetime income, you will need to continually reevaluate your selection. If you don’t use target date funds, you want to still be sure you’re taking an extra deep dive into monitoring that decision as well as the underlying investments. The Department of Labor (DOL) stipulates that special care and attention be paid to these investments, and it makes sense since the majority of assets will land here if your plan uses automatic enrollment. This should be done periodically, considering performance and also suitability against what else is available and how your employee characteristics have changed (or not).
Regulatory Compliance
Your advisor should keep you informed about regulatory updates that may affect your investment lineup, such as recent whiplash from the changes in administration and the policy towards ESG (Environmental, Social, Governance) investment guidelines. (I think we’re on our fourth iteration of that, but I’ve lost count TBH.) Best practices will shift based on regulatory changes and the outcome of litigation. It's always best to be proactively informed rather than surprised or reactively determining past compliance.
Plan Sponsor Collaboration
Collaboration goes without saying. Your investment advisor should collaborate with you to ensure the fund menu reflects your plan's unique characteristics and supports your specific plan design needs. This will be dictated by the beliefs held by the committee, the employee demographics, recruiting and retention needs, business changes and broader goals. Plan advisors need to be pulling all of this information together and using it to drive the plan’s investment construction.
Technology and Data Analysis
Look for an advisor who uses data analytics to monitor funds, generate clear reports, and identify potential risks or opportunities within your fund menu. Now, back to appropriate benchmarks and evaluating the funds. The best and worst thing that we did with retirement plans is the concept of the scorecard. It ties back to the criteria in the IPS. However, the score can’t be used as the only thing to evaluate the funds because you have to look at them in the current investment environment, as mentioned before. So, being aware of how those scorecards are constructed and the investment advisor being able to speak to when it might be most prudent to deviate from them is very important. You don't want a failure to address underperformance in a timely manner, so your advisor helping to document decisions and provide context in meeting notes becomes your safe haven.
Red Flags: When Your Investment Advisor Isn't Measuring Up
Some red flags may now be fairly obvious, having read the above. But just in case…
Inadequate Performance Monitoring
If your advisor fails to establish or can’t explain what makes appropriate benchmarks, regularly evaluate fund performance, or address underperformance promptly, that's a major concern. So is not being able to put investment performance into context. We have taken new clients on and asked, “How did you get this fund menu?” And they responded, “I don't know. The record keeper gave it to us, maybe?” This is dangerous because it shows a complete lack of monitoring and oversight. If you can say these things, it’s a problem: I can’t remember when we reviewed the funds, we don’t have an investment policy statement that I know of, I don’t know what these reports mean.
Lack of Documentation
Your advisor should provide due diligence documents that demonstrate their fund selection rationale and performance monitoring activities. If you blindly follow a score card for the investments and ignore everything else, you could end up in trouble because there might be a fund that's actually a really solid fund and there's a very good reason for its underperformance. No IPS, no reports, no meeting notes = not a good advisor. Document it or it didn’t happen.
Poor Communication
When are your meetings? When does the advisor reach out to you? Are you driving the relationship or compelling them to be proactive? If meetings are infrequent, updates are unclear, or explanations are filled with jargon, your advisor may not be effectively communicating essential information, let alone taking your concerns into account. A complaint from a client who switched to us was, "They'd show up, they'd dump a bunch of reports on us, we had no idea what it meant. We didn't know what we didn't know about it." Jargon-heavy conversations of days past are no longer acceptable. So is not finding out about best practices or having a plan that 2009 wants to have back because it’s only adequate instead of optimal.
Compliance Issues
Your advisor should keep you informed about ERISA regulations and industry best practices, providing documentation of compliance through detailed meeting minutes. They should be taking you through the newest information and showing you how it applies to your plan and the investments. If you are surprised by ERISA regulations or other industry best practices or they're not providing documentation of compliance, your meeting minutes, being able to talk about what investments were covered and what the decisions were, etc., that's a big red flag.
Ignoring Participant Demographics
A one-size-fits-all approach rarely works well. When a lineup is constructed, you really do have to think about who it's for. There's just no way around that. Your advisor should tailor the investment lineup to your specific employee population. Think about the difference between an employee that works on the factory line versus a lawyer. These two employees will make decisions differently and will have very different needs and inputs into those decisions. This simply cannot be ignored in the investment lineup or the plan design.
Insufficient Fee Analysis
Your advisor should understand how investments affect plan pricing and be able to explain the fee implications of any changes to your investment lineup. Repeating my example earlier about some “surprise fees” on their statement, the plan sponsor called and said, “Hey, I don't know what's going on. We made changes to the lineup and all of a sudden employees are starting to see all these fees show up on their statements,” and the investment advisor couldn't really explain what happened other than “We added some index funds, and it seems like they don't have any revenue sharing.” Bottom line, this occurred because the advisor ignored the plan’s cost construct and employee communication was never considered.
Outdated Investment Policy Statement
If your IPS hasn't been reviewed in years or isn't being followed consistently, that's a significant red flag. If that IPS is just vague or it's inconsistent with the plan's objectives or you're failing to follow it, and you can't remember what it said because nobody's looked at it in years, that is a serious problem.
Poor Menu Construction
Too many investment options can overwhelm participants. An effective advisor carefully balances providing adequate choices without causing "choice overload." Looking back on an old study about choice architecture by Iyengar and Lepper (2001), two stands were set up in a grocery store offering jam. One had six options, the other twenty-four. While more people stopped at the plentiful stand, more people actually bought jam from the stand with less choices. It was shown that too many options often stands in the way of taking action. Invest-for-me, invest-myself, help me do it, low cost… investor behavior profiles and decision making should be considered as key inputs to the investment menu.
The Specialist Advantage
Remember that retirement plan advisory is a specialized field, different from wealth management or financial planning. Working with an advisor who focuses specifically on retirement plans ensures you're getting the expertise your plan deserves.
If you have questions about what to expect from your retirement plan investment advisor or want to discuss whether your current advisor is meeting these standards, reach out to us.
We're here to help you ensure your retirement plan is working optimally, for both your company and your employees.