“Oversimplification: simplify to such an extent that distortions, misunderstandings or errors arise.”
There have been some very black-and-white and simplistic opinions circulating within the investment world recently in regards to the prudence of lively management.
They recommend that plan sponsors switch to passively managed options by default, suggesting that the committee will “do no harm” by moving from lively funds to passive funds.
This is a really simplified view.
The members of the Investment Committee are trustees inside the meaning of Employee Retirement Planning Act (ERISA). The duty of an ERISA fiduciary will not be to “do no harm.” Rather, the standards to which ERISA fiduciaries are held are much higher. This includes acting prudently and solely within the interests of the plan’s participants and beneficiaries and diversifying the plan’s investments to attenuate the chance of huge losses.
Fiduciaries must deal with what’s in the perfect interests of participants. In some cases this might cause them to select lively funds, in others passive funds could also be more appropriate. But in any case passive funds and “do no harm” are synonymous.
The notion that selecting between lively and passive investing in some way reduces fiduciary risk is unfounded and ignores the more essential areas that ERISA fiduciaries should consider when choosing probably the most appropriate Target Fund (TDF).
The authors also suggest that investment committees should select passively managed TDFs because the default option. Although TDFs are often the perfect selection, it is crucial to do not forget that there is no such thing as a such thing as passively managed TDFs.
All TDFs require lively decisions by the TDF manager. At a minimum, managers must select which asset classes to incorporate within the funds, which managers to staff those categories, find out how to allocate those categories for every age group, and the way that allocation changes over time (i.e., the glide path). The authors don’t consider the incontrovertible fact that asset class selection and glide path construction are critical and inevitable lively decisions made by portfolio managers, no matter whether or not they select lively or passive underlying strategies inside the goal fund.
In fact, the glide path and asset class selection are much more vital aspects influencing investor outcomes than the choice to implement an lively, passive or hybrid approach.
Because most latest contributions to DC plans are invested in TDFs and plenty of plans have chosen TDFs as their default, the selection of the plan’s TDF is probably going an important decision the investment committee will make. Such a very important decision should consider far more than simply whether the TDF portfolios use lively or passive underlying strategies.
For example, a series of passively managed TDFs may carry an excessive amount of risk at an inopportune time—say, at retirement age. This could end in significant losses for a person who doesn’t have time (or wage income) to get well. Bailey and Winkelmann deal with the everlasting lively versus passive debate moderately than an important and influential consideration for retirees: income alternative.
We consider that considering participant demographics, resembling salary levels, contribution rates, turnover rates, withdrawal patterns, and whether the corporate maintains an outlined profit plan for its employees, will help the Committee determine the TDF glide path that’s in the perfect interests of participants and helps them achieve their income alternative goals.
We also recognize the role we play in helping investors achieve their retirement and post-retirement goals. We consider that concluding that plan sponsors should simply select passive moderately than lively investing to cut back fiduciary risk is inconsistent with ERISA standards or outcomes for plan participants.
Plan demographics, glide path, and asset class diversification are much more vital considerations than whether a TDF manager selects lively or passive underlying components.
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