Our recent publication has generated considerable debate over a small section of a really broad strategy book. Some critics have misinterpreted our discussion of the inclusion of actively managed investment options in defined contribution (DC) plans. Much of this controversy was sparked by an industry article that falsely claimed that we believed DC sponsors may very well be sued in the event that they hire energetic managers.
We said nothing like that.
To be clear, we’re skeptics of energetic management. Hiring and retaining energetic managers who add value is difficult, even when sponsors’ investment committees are guided by skilled support. Some plan sponsors have considered the difficulty and chosen to supply only a spread of passively managed investment options. On the opposite hand, many sponsors have included actively managed investment options and haven’t faced legal consequences for these decisions.
We don’t imagine that sponsors who conduct appropriate due diligence and decide to offer energetic investment strategies of their investment portfolios are exposing themselves to legal risk. We argue that sponsors should do no harm when choosing their investment options. By this we mean that sponsors should fastidiously weigh the prices related to energetic manager selection (fees, additional investment risks, participant communications, and investment committee time) and satisfy themselves through their documented considerations that the advantages outweigh the prices. This seems an obvious goal for choosing any investment options.
However, we would really like to emphasize that this statement is a policy guideline and never a legal standard. We have suggested that sponsors start with passive management as the idea for choosing investment options. Active management is predicated on deviations from a passive benchmark. If energetic managers cannot add value, passive management is the popular position, not the opposite way around.
That hardly seems controversial. We imagine many sponsors will and may reach that position. However, if a sponsor can persuade itself through thorough research that the extra fees and extra energetic management risk of an actively managed strategy best serve the objectives of a portion of its plan participants, then the sponsor’s hiring of the manager is justified. There isn’t any serious legal risk.
Different stakeholders come to different conclusions in regards to the value of energetic management in several asset classes and investment strategies. For this reason, the talk about energetic versus passive management has been raging for 50 years and shouldn’t be going away anytime soon.
We encourage interested practitioners to read our entire book. It is stuffed with interesting observations and proposals on all areas of responsibility of DC plan sponsors. We expect readers will agree with us on some points and disagree (perhaps strongly) on others. That is the character of research and informed debate.
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