John Wooden once said “Don’t mistake activity with achievement.” Sadly, in the retirement plan industry, activity-based metrics have been the norm for measuring a plan’s success. Don’t be fooled, activity-based metrics don’t equal plan performance achievement. The actual performance of the plan is critical to having confidence you’re providing a good plan for your employees. Confidence can be attained by knowing you have a top-performing plan.
As a reminder, a top performing plan is one where:
1. The investment lineup is outperforming,
2. The fees paid by the plan are low, and
3. Employees are better prepared for retirement.
The focus needs to be on the plan’s performance, not plan activity.
Let’s look closer at the first critical element of plan performance.
How do you know if your investment lineup is outperforming?How most lineups are measured:
A typical investment performance report may show performance characteristics of each fund, and these metrics are compared to an assigned benchmark. Each fund may be monitored by returns, risk, and other metrics. Sometimes these metrics are combined into a score for each fund.
By this standard as long as a poor performing fund is replaced by a stellar performer, it will appear at your investment review meetings as though your lineup is always doing great. The old fund is removed and the bad performance is forgotten
All that’s reported to you is the historical performance of the funds currently in your plan (regardless of when they were added to your plan).
When new funds are added to your plan, their track records are reported to you at each meeting even though your participants didn’t actually get those results. The current way of reviewing the investment lineup simply doesn’t tell the true performance story. The current way of reporting: A better way to measure:
A fund’s performance should only be tracked and reported while it is in the plan lineup, and should be compared to an appropriate index.
Even if a low-performing fund is replaced, its performance should continue to factor in to plan performance for the time is was included. Performance for the new fund should be reported only for the time it was a part of the plan.
When it’s time to measure plan performance, the combined performance of the fund lineup in the plan should be measured and compared to an index lineup. The results will be clear and obvious – either the lineup outperformed, or it didn’t.This approach brings complete transparency to the plan’s investment lineup performance.
You don’t need to be confused or overwhelmed by a 100+ page investment report. You just need a simple and transparent report that shows the investment lineup’s performance for the funds in the plan while you held them in the plan, accounting for the good and bad performance. It’s that simple.
Next time, we’ll take a closer look at the performance standard for plan fees.
If you’re tired of looking at the same investment reports and want to know how your plan is ACTUALLY performing, contact us at email@example.com. We would be happy to unveil your plan’s performance using the performance standards discussed here.
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.
Cody Mendenhall, CFP®, Executive Director
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