SUMMARY
A truly excellent retirement plan benefits both employees and employer. Regulatory compliance is the baseline of excellence—not the finish line. In this series on “going beyond the regulations,” we cover best practices across six areas:
- Fiduciary Governance
- Plan Design
- Fee Structure
- Investment Process
- Participant Support
- Provider Management
Each entry in the series is anchored by a quick-reference table of best practices. We also share examples drawn from our professional experience with real-world insights and tangible strategies. We invite you to join us as we explore the nuances of creating and maintaining an outstanding retirement plan.
More than picking winners
When discussing retirement plans, people often gravitate first toward investment selection. It's a common misconception that this area is mostly about picking high-performing funds. It’s actually about a process—one that needs strategic, ongoing management.
Regularly streamlining the investment lineup, conducting due diligence, and using an active Investment Policy Statement can transform a standard retirement plan into a dynamic tool that evolves with market trends and employee needs.
We've seen firsthand in our professional experiences how a well-structured investment process can make a significant positive impact. Here are a few examples:
- Re-enrolling participants into a plan's Qualified Default Investment Alternative (QDIA) can be an effective way to avoid the problem of employees' initial investment choices, made decades ago, no longer aligning with their current life stage.
- Limiting an investment lineup to a single fund per asset class prevents the illusion of diversity—which can lead to employees unknowingly doubling down on similar assets (such as large-cap tech stocks in multiple funds).
- Conducting annual reviews of the investment lineup ensures that the selected funds remain suitable and competitive, adapting to both market changes and evolving participant needs. This proactive approach helps maintain the plan's relevance and effectiveness.
- Implementing a well-defined Investment Policy Statement (IPS) provides a structured framework for investment decisions. A living document, the IPS outlines clear criteria for fund selection and monitoring, reducing fiduciary risk and ensuring that investment choices align with the plan's objectives.
Now we’ll share two real-life examples that illustrate bringing discipline to the investment process matters so much. Both are drawn from our own experience working with clients.
Example 1: Streamline Investment Menu Line-up
We worked with a client who offered over 100 funds within their 401(k), only 21 of which were being actively utilized by plan participants. In several cases, there were 5 – 7 funds offered in each core asset class (e.g. Large Cap Growth, Core Fixed Income). Having this many investment offerings resulted in undue complexity and confusion for the plan sponsor and plan participants. We worked to streamline the investment menu line-up, reducing the number of investment offerings down to 20, while ensuring the core asset classes were available to plan participants.
Example 2: Review Investment Due Diligence Reports Annually
In meeting with a new client, it came to light it had been eight years since they had performed an investment due diligence review of their line-up. After conducing the investment due diligence review, several funds were identified as exhibiting deficiencies (i.e. consistent underperformance, management changes, declining asset base). Those funds that were identified were removed and replaced with fund meeting the criteria and objectives laid out in the Investment Policy Statement.
Best practices for investment process
Now let’s turn to best practices. As with prior entries in this series, we’ve captured the heart of the matter in a table highlighting both “what” and “why.”
Ensure that plan’s core investment lineup has no more than one fund per asset class
What it is:
A streamlined approach where each asset class in the plan's core investment lineup is represented by only one fund.
Why it matters to the business owner:
Simplifies investment choices, reduces overlap, and makes the plan easier to manage and monitor.
Why it matters to the employee:
Helps employees make clearer investment decisions and ensures true diversification in their portfolio.
Consider re-enrolling your current participants into plan’s QDIA
What it is:
Re-enrolling participants into the plan's Qualified Default Investment Alternative (QDIA) for better alignment with their current needs.
Why it matters to the business owner:
Ensures that employees' investments remain suitable over time, reflecting changes in risk tolerance and life stages.
Why it matters to the employee:
Provides a reassessment of their investment strategy, keeping it aligned with their current situation and future goals.
Streamline investment menu line-up
What it is:
Ensure core asset classes are offered in ivestment menue line-up.
Why it matters to the business owner:
Helps ensure plan participants have access to core asset classes, allowing them to construct an adequately diversified portfolio.
Why it matters to the employee:
Helps ensure plan participants have access to core asset classes, allowing them to construct an adequately diversified portfolio.
Review investment due diligence reports at least annually
What it is:
Conducting annual reviews of investment performance and due diligence reports.
Why it matters to the business owner:
Keeps the investment lineup current and effective, ensuring compliance with fiduciary responsibilities.
Why it matters to the employee:
Assures employees that their investment options are regularly evaluated and remain competitive.
Clearly defined “watch list” process
What it is:
Establishing a process for monitoring underperforming funds and considering their replacement.
Why it matters to the business owner:
Facilitates proactive plan management and demonstrates a commitment to maintaining a high-quality investment lineup.
Why it matters to the employee:
Enhances trust in the plan's performance and management, knowing that investments are continually scrutinized for their effectiveness.
Utilize an investment policy statement
What it is:
Creating and adhering to an Investment Policy Statement (IPS) that outlines the plan's investment philosophy and criteria.
Why it matters to the business owner:
Provides a structured framework for investment decisions, reducing fiduciary risk and ensuring consistency.
Why it matters to the employee:
Offers transparency and a clear understanding of how investment decisions are made, boosting confidence in the plan.
Next steps
We’ve now moved through four of the six entries in this series. Next up is Participant Support.
