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Results from PCI’s ILPS Report Finds More Than 60% of 401(k) Plan Investment Lineups Underperform All-Index Lineups
Last Updated: July 01, 2024
Pension Consultants, Inc. (PCI) is excited to share the findings from the latest release of our “401(k) Investment Lineup vs. Passive Scorecard Report.”
In our ongoing efforts to address the question, ‘Do 401(k) investment lineups outperform all-index lineups,” we engage Dr. Rui Yao, CFP®, PhD, Professor and Director of Graduate Studies of Personal Finance Planning at the University of Missouri, to conduct annual research that helps us uncover the answer. This is the 9th year that this data has been analyzed using the established peer-reviewed methodology from ‘Use of Advisors and Retirement Plan Performance,’ introduced in 2018. This paper, published in the Journal of Financial Counseling and Planning, identified the method for assessing whether the funds included in 401(k) lineups benefit plan participants, compared to if they were invested in the corresponding and relative index.
This year’s results, reporting for approximately 5,000 plans in 2021, found that the percentage of plans that achieved a higher expected return than their corresponding benchmark was 38.87%.
When adjusting for risk (standard deviation), only 13.58% of overall plans outperformed their benchmark. Compared to the previous reporting year (2020), this was a significant downturn in overall plan investment lineup performance. The only notable outlier in this trend was the results of the Lower Downside Risk panel (D) of the largest plan type of $500 million or more. 50.82% of these plans outperformed their all-index lineup benchmark when downside (or short-term loss) risk was factored into the analysis.
This research has found that retirement plan investment lineups underperform all-index lineups most years. In fact, only 2 of the last 9 years have shown to have achieved outperformance – 2017 and 2020.
“I believe that the lack of standardization in performance reporting for defined contribution plans has led to a situation where poor performance can be obscured, leaving committees unaware of the true impact on participants. Without a standardized historical performance methodology, advisers can replace underperforming funds with those that have strong track records, making the plan lineup appear robust today while participants absorbed the plan’s poor returns yesterday,” says Pension Consultants, Inc. Senior Director, Zach Allen, CFA.
He continues, “Our research shows the negative impact of this while establishing the appropriate methodology for calculating plan performance.”
Percentage of Defined Contribution Plans Outperforming an All-Index Lineup on a Year-By-Year Basis.
2020
75.51%
2019
25.07%
2018
27.86%
2017
82.66%
2016
10.59%
2015
30.48%
2014
11.96%
2013
31.67%
This study highlights a need for fiduciary committees to know and understand their plan’s investment lineup’s actual performance to avoid being in the majority of underperformers.
Complete findings from the PCI’s 2024 401(k) Investment Lineup vs. Passive Scorecard Report are available at the official location here.
Small Improvements Can Make a Big Difference
Learn more about how small improvements in your investment lineup’s performance, compounded over a working career, can dramatically improve the retirement readiness of your employees.
Methodology
Each year, the findings are gathered by analyzing approximately 5,000 randomly selected plans that offer mutual funds to their participants. These plans must have at least 100 participants and assets over $1 million. The report evaluates performance both at the individual fund level as well as the overall plan level.
The report considers several methods for determining if a fund outperforms its assigned index during a calendar year. Table 1 reports the number of the total population and the sample of each fund size category. Table 2 reports the mean ratio of funds in plans that outperformed their benchmark. Table 3 reports the percentage of plans in general and in each size category that outperformed their benchmark.
The performance measures five panels of analysis for both the fund level and the plan level. The panels include higher expected return, lower risk (standard deviation), higher Sharpe ratio, lower downside risk, and higher Sortino ratio.
How 401(k) Fund Changes Can Hide Poor Investment Performance
Have you wondered if you have the complete investment performance story for your 401(k) plan? You aren’t alone.
View webinar on-demand hosted by Chris Thixton, QPA, QKC
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If you’d like to address your participants’ retirement readiness, we welcome you to schedule a consultation with our team of experts. Together, we can make a positive impact on your employee’s financial security.
