There is perhaps no service plan advisors and providers offer that is more valued by plan sponsors than counsel on investments. How, and how often, do NAPA Net readers do so?
Not surprisingly perhaps, a majority (69%) of this week’s respondents review plan investments on a quarterly basis. However, a strong quarter (24%) do so monthly, and 7% do so on varying frequencies, depending on the plan(s) and asset(s). A couple do so on a semi-annual basis.
Replacement ‘Rates’
We also asked if, during those reviews, a fund was discovered to have a performance issue, how long before a replacement mandate was issued. A plurality (42%) said it generally took 6-12 months, while about a quarter each said either less than a month, or more than 12 months. Approximately 8% said it took one to three months.
“We make changes to the investment lineup annually,” explained one. “The following is our guideline for removal. If a fund fails to meet the criteria standards, as determined by its score, it will be placed on a watch list. (In the event a fund receives a score which is below that of watch list status, or experiences extraordinary circumstances which may render it inappropriate to maintain, it may be considered for removal at the earliest administratively reasonable date.) If this fund continues to remain on the watch list for the following three quarters, or four of the following seven quarters, the fund should be considered for possible removal. If the fund meets criteria standards for four consecutive quarters, it may be removed from the watch list.”
Another reader said, “It depends. If the underperformance is because it is high quality and there has been a low quality rally, then it could take longer than 12 month, and even years. Or, if there has been a significant disruption in the organization such as star PM departure, significant cash outflows, etc., then it may be less than a month.”
“Once a fund’s peer relative strength ranking falls below 50% it goes on a watch list,” noted another respondent, who went on to say that, “It is then monitored for six months. If it does not rise above the 50% peer relative strength ranking, it is replaced. Replacement requires a minimum of 30 days notice.”
“As a 3(21) advisor, we only issues alerts, not mandates,” explained another, who went on to note that, “Those alerts are always accompanied by recommended alternatives.”
“We watch list poor performers for a minimum of two quarters; while watch-listed, due diligence is enhanced to determine cause of underperformance,” noted another reader.
Changed Miens?
Asked how long between the mandate issuance and the selection of a replacement fund, more than half (54%) said less than a month. Approximately 39% said it generally took one to three months, and the rest three to six months.
“We plan on 45 days for the removal and replacement,” explained one reader. “We always have a couple options in each category that have been vetted through our process,” noted another. “The selection of the alternative is made coincident with the decision to replace,” said another reader. “After all, a decision to sell only makes sense if the alternative is perceived to be better.”
As for any change in those time frames, more than half (62%) said they hadn’t changed in the past five years, while 23% said they hadn’t changed much in that timeframe. However, about 8% each noted that it either had changed, or had changed significantly.
Influencing Factors
When it came to making a decision on which investment options to recommend, nearly half utilized a variety of tools/options, about a quarter each said it was based on their preference or their firm’s preferences, 15% turned to the plan sponsor, and 8% said it was influenced by the recordkeeper platform (more than one choice was permitted).
As for which factor was most important (and according to respondents, these hadn’t changed in the past five years), the top three were:
- advisor preference (31%)
- firm’s recommendation (23%)
- plan sponsor (15%)
Thanks to everyone who participated in this week’s NAPA Net reader poll!
Got a burning question you’d like to run past your peers? Curious about the industry’s perspective on a particular issue? Email me at [email protected], or post it in the comments section below.
