PLANSPONSOR - October/November 2021 - 35

PLAN BENCHMARKING | INVESTMENT STRATEGIES
Indices Versus Active] Scorecard " report,
for example, says that, over the 12-month
period ending June 30, 58% of large-cap
funds, 76% of mid-cap funds and 78% of
small-cap funds trailed the S&P 500, the
S&P MidCap 400 and the S&P SmallCap
600, respectively. The authors cite SPIVA
year-end reports showing that more than
50% of large-cap funds have lagged the
S&P 500 each year for 11 consecutive years.
Defenders of using actively managed
funds in DC plans, however, observe that
the converse of those statistics is also true:
The top quartile, and more, did outperform
the indices, and close to half of largecap
funds have beat the S&P 500 each year
for over a decade. Therefore, they say, there
are skilled active managers that can consistently
beat their benchmarks and offer
higher returns net of fees.
Each side of the argument has its
supporters.
Kristen Carlisle, general manager
at recordkeeping platform Betterment
for Business and head of Betterment's
401(k) business in New York City, says her
firm believes passive strategies are better
for retirement savers. " We use low-cost,
passive ETFs [exchange-traded funds]
... and we're able to keep costs low, " she
says, noting that actively managed funds
generally have higher fees to account for
the work in managing the fund. " Plan
fiduciaries need to offer investments that
employees understand and that will help
them reach their goals. Participants want
to maximize their savings, and lower fees
help do that. "
Weighing in on the conversation,
with a perspective on target-date funds
(TDFs), which hold most of participant
assets, Maddi Dessner, head of
global asset class services at investment
management firm Capital Group in New
York City, says cost is not the only thing
fiduciaries should consider. They should
also determine what investors will receive
in returns net of fees, she says. " Cost is
a limiting way to consider active versus
passive management and what value
participants will receive. "
It is important for fiduciaries to select
the type of investment that accords
with plan goals written in the plan's
investment policy statement ...
She mentions Department of Labor
(DOL) guidance on fees that urges sponsors
to consider both value and cost;
she adds that the DOL's tip sheet for
selecting TDFs recommends that sponsors
look for strategies that align with
the goals and objectives of the plan and
the participants.
For all investments, passive or actively
managed, plan fiduciaries should do their
due diligence on investment managers,
scrutinizing all factors pertinent to the
professional's role in monitoring investments,
Tiemann says. For example, sponsors
should ascertain whether the investment
manager has a good track record.
To the argument that active fund
managers have a hard time outperforming
benchmarks, Dessner says a recent study
by Morningstar comparing active and
passive TDFs found their performance
did not meaningfully differ. The report
concludes that " for the most part, the
returns since the common inceptions
are tight across the six firms we focused
on, net of fees. No series outperformed
its sibling by more than .50% annualized
for either the 2025 or 2045 vintages
over their common track record since the
end of 2020. Overall there doesn't seem
to be a clear-cut winner between a firm's
active-based and index-based series, as
long as the glide path and asset allocation
are consistent for both options. "
Experts stress that selecting and
following up on all funds involves
rigorous due diligence for DC plan
committees. Especially when it comes to
TDFs, whether using underlying active or
passive investments, plan sponsors must
monitor the funds' glide path and how the
investments are faring.
" Also, fiduciaries can't get away from
the fact that the structure of a glide path
is an active decision, " Dessner observes.
" This also produces differences in results.
In the past five years, older participants
have seen returns vary by 12% or more at a
critical time in their lifecycle. "
Even in the core investment menu,
Dessner says, it is not wrong for sponsors
to include actively managed funds if
those deliver net-of-fee results better than
benchmarks. She says concentrations in
particular investments have significant
risks, and that is what is embedded in
passive exposures, so finding more ways
to diversify from a benchmark can be a
good thing.
" When selecting from the core menu,
participants tend not to select investments
to get diversification from concentration
risk, " Dessner continues. " The
option for plan sponsors is to simplify the
investment menu and offer investments
that will deliver returns net of fees. "
Participant and Plan Goals
It is important for fiduciaries to select the
type of investment that accords with plan
goals written in the plan's investment
policy statement (IPS) and goals of participants
based on their sophistication and
ability to make choices, Tiemann says.
Typically, an IPS does not specify that the
plan investment menu will include active
investments, but this would not preclude
a committee from selecting an actively
managed fund if those fiduciaries determine
it is a good choice for plan participants,
he says.
In selecting funds, whether active or
passive, Tiemann says, plan fiduciaries
need a prudent process to perform their
due diligence for determining what is
best for their plan. -Rebecca Moore
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