Good news in this tumultuous year!
There’s a breakthrough in how to evaluate the performance of Defined Contribution retirement plans. The new PCI Rᴇᴛɪʀᴇᴍᴇɴᴛ Pʟᴀɴ Pᴇʀғᴏʀᴍᴀɴᴄᴇ Rᴇᴘᴏʀᴛ™ brings the missing number to an industry that should be focused on preparing workers to retire on time with dignity.
The PCI Rᴇᴛɪʀᴇᴍᴇɴᴛ Pʟᴀɴ Pᴇʀғᴏʀᴍᴀɴᴄᴇ Rᴇᴘᴏʀᴛ™ delivers the first-ever objective measurement of whether investment portfolios of mutual funds — the investment lineups — inside defined contribution plans have outperformed comparable groups of market indices. Simply put, it shows whether the funds selected by plan investment advisers are giving plan participants effective choices and, by extension, a chance to successfully prepare for retirement. This is a critical statistic for a nation that depends on defined contribution plans — 401(k) and 403(b) plans — as the main vehicle for workers to save and invest.
The Report’s yearly findings are compiled by conducting in-depth analysis on more than 2,000 randomly selected plans that offer mutual funds and have at least 100 participants and plan assets ranging from $1 million to more than $500 million. Results are available for 2013, 2014, 2015, 2016, and 2017. Click here to review the Report’s findings.
We All Need to Know
Why is this measurement so important? Because participants can only invest in the funds that are chosen for their plan. If those funds don’t perform well — and especially if they are “dogs,” as they’re known inside the investing business — then participants’ hard-earned contributions can’t perform well. That poor performance shrinks the probability that anyone in the plan will be able to retire on time with dignity.
Participants aren’t the only ones who should have their eyes on investment performance versus an objective benchmark. Plan committees of fiduciaries — who are responsible for selecting their plan’s investment lineup — should know how effective their choices are. Especially given their legal duty to operate the plan in the best interest of participants. Beyond that, seeing results can provide powerful motivation for the many engaged and compassionate committee members who truly want their plan and people to succeed.
Another group that should be paying attention? The more than 250,000 U.S. financial advisers who work for Defined Contribution plans in the United States. The Report offers a glimpse into how successful they are — or are not — at choosing investments that work for participants. If advisers aren’t contributing value, why are they being paid? And if they’re not bringing effective choices to plan committees, why not? Looking head-on at results is one of the best ways to flush out conflicts of interest. As the saying goes, sunlight is the best disinfectant.
Outperformance eludes most plans in most years
What does the Report reveal? Looking year by year, it shows that there are always some outperforming plans, proving that picking great funds is not impossible. Even more powerfully, the Report shows without question that outperformance eludes most plans in most years. This should be a call to action, but not to automatically abandon actively managed funds for index funds. Rather, it should drive people to ask how they can achieve what some plans have — to outperform.
The Report also is a useful tool to identify other trends. In some years, strong overall investment market performance translated into strong overall plan results, as seen in 2017. In other years, such as 2014 and 2016, more challenging market conditions made it even more difficult for plans to outpace their benchmark. Insights are also revealed about performance and plan asset size.
Asking — and Answering — the Important Question
Why go to all this effort to measure plan performance? It ties back to the mission of Pension Consultants, Inc. (PCI): to improve the financial security of American workers. The PCI Retirement Plan Performance Report™ was initiated by PCI in 2017 by commissioning the original academic study that developed the Report’s methodology. Why? To fill a gaping hole in the plan industry — how to objectively and consistently measure the performance of plans’ investment lineups. And to make that performance transparent to plan sponsors, committee members, and participants, along with the world of plan advisers and observers. PCI believes everyone should be able to answer the question, “How am I doing?”
The PCI Retirement Plan Performance Report™ was introduced in 2020 after years of research and development. The methodology carried forward into the Report was developed by Rui Yao, PhD, CFP®, of the University of Missouri. The initial results and analyses were peer reviewed and then published in 2020 as “Use of Advisors and Retirement Plan Performance” in the distinguished academic publication Journal of Financial Counseling and Planning (31(1)). Cody Mendenhall, CFP®, PCI’s executive director, was a co-author. Dr. Yao continues to perform the data analysis for the Report. The next annual update, examining 2018 results, is anticipated for May 2021.