Plan Progress Series: Mid-Year Investment Review

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A recent PLANSPONSOR webinar reviewed how investment committees are fulfilling their fiduciary responsibilities as they look toward a post-pandemic society, as well as best practices to follow for the second half of 2021. 

Investment experts began the discussion during the “Plan Progress Series: Mid-Year Investment Review” by reviewing equity market performances over the past year. Mat Powers, manager, retirement consulting investment services at Commonwealth Financial Network, said the news of effective COVID-19 vaccination efforts solidified much stronger performances in the first half of 2021 compared with the onset of the pandemic in early 2020. “As the vaccination efforts have proved successful, businesses have been able to rebound,” he said.

And as vaccines expand in availability around the world, Powers said he anticipates fruitful gains on a global scale. “If the vaccine succeeds in the global market, I think there is a lot of room for strong performance in the latter year.” However, he warned plan sponsors of possible risks with the threat of new variants of the coronavirus. “Things can certainly turn on a dime,” he noted.

Low interest rates are also encouraging investors—including retirement plan investors—to mitigate risk and find ways to create returns. Peter Di Teresa, head of manager selection at Morningstar Research Services LLC, noted during that panel that yield curves have steepened significantly from the same time a year ago. Powers agreed, adding that interest rates are having a great impact on fixed income and other investments.

When asked what types of investments a defined contribution (DC) plan fund lineup needs to have to ensure diversification, Powers said target-date funds (TDFs) are at the top of the list, but he cautioned against offering too many funds. “TDFs are best because they receive the bulk of the assets in the 401(k),” he said.

Additionally, before offering TDFs, plan sponsors should understand the TDF glide path and show how it was considered and selected as a prudent option for participants, Powers added.

“Sponsors should look into the equity portion and how much is in domestic equity and how much is in long-term bond or short-term bond durations,” he explained. “Sponsors have to be able to demonstrate due diligence on the glide path itself.”

Reviewing the glide path is not only a way for sponsors to fulfill their fiduciary duties, but it can also be insightful to understand how the fund evolves over time, Di Teresa said. For example, as a participant reaches retirement, sponsors and advisers should search for other types of diversification that can fund the participant’s retirement, such as real asset exposure, inflation-protected exposure, etc., he continued.

“With the proliferation of target-date vehicles, we have seen more and more variety in terms of the overall risk profile,” Di Teresa said. “Ones that are more aggressive, ones that are moderate and others that are more conservative.”

Powers added, “Where the large majority of participants are using their retirement as long-term savings vehicle, it’s important to enact a long-term perspective. Looking at five- or 10-year metrics can establish a framework to the fund as a long-term savings option.”

These metrics can even include manager tenure and how turnover affects investment portfolios. For example, if an employer is currently offering a large-cap growth fund but will move to more of a blend approach under a new manager, plan sponsors must be prepared.

“Thinking about the long-term is key,” said Di Teresa. “The expectation is that once you invest in these funds, you’re going to be sticking to them for a long time.”

Meanwhile, looking toward other investment trends, as interest in environment, social and governance (ESG) funds grow, both Powers and Di Teresa advised employers that there are key steps they should take to avoid fiduciary risk if they’re interested in using an ESG fund. First, sponsors should evaluate ESG funds in the same manner they would with any other investment, Powers said. Second, outline what an ESG fund will look like in the investment policy statement (IPS).

“Make sure you are clear in the statement,” Di Teresa said. “You want to make sure that you are not committing yourself to something that you have not intended.”