Retirement Meditation #32: What should I do if some of our retirement plan’s investment options have negative returns?

Insights | Retirement Meditation #32: What should I do if some of our retirement plan’s investment options have negative returns?
Percentage of S&P 500 stocks trading above their 150 day moving average June 17, 2022

Author: Paul A. Carl, CHSA, CPFA Vice President, Retirement Plan Consulting, Registered Representative

Back in the “old days” when I was with the Department of Labor, most of the retirement plans we reviewed were still managed under a single investment objective. During one investigation particularly, we cited a bank trust department for several violations of ERISA. The bank trust department had invested the assets of clients’ plans into the common stock of a widely-held, publicly traded company that enjoyed a positive return of more than 50% during the measured period. So why did we find ERISA violations if the investment had performed so well? The bank had created an excessive concentration (think diversification) in this one stock for many of their retirement plan clients’ portfolios. Further, we had uncovered expressed evidence that the bank’s decision to invest was more emotionally driven than arrived at through the institution’s stated normal investment due diligence processes. 

From an employer viewpoint, populating the investment menu with the “right” investment options, whether they are mutual funds, collective investment trusts (commonly called “CITs”), or a combination, should reflect a due diligence process that is fiduciarily sound. A best practice to help establish this due diligence process is to adopt an Investment Policy Statement (commonly called the “IPS”). Plan fiduciaries, including the ERISA 3(21) investment advisor and 3(38) investment manager, should be able to rely on the IPS to provide investment guidelines in a meaningful way. 

Overall, an IPS should cover several key factors:

  • The plan’s overall investment philosophy and objectives
  • Appropriate menu construction 
  • The types of investments to be used to populate the investment menu
  • The factors to apply in selecting an acceptable investment
  • The circumstances used to determine when an investment should be placed on watch and when it should be removed

In addition to these key factors, the IPS should not be too constraining. Too much detail can be as inefficient to the investment process as too little. Thus, it’s important to periodically evaluate and, as applicable, revise the IPS to ensure that it is meeting and will continue to meet the needs of its governing fiduciaries who ultimately serve the plan participants. 

Do you have an Investment Policy Statement for your plan?

The content of this blog is offered by HORAN Wealth Management, an SEC registered investment advisor. This information is not intended to serve as legal advice or as a substitute for the advice of your own counsel and should not be relied upon as such, as the advice appropriate for you will be dependent upon the particular facts and circumstances of your situation. Linked Websites: We provide links to other sites that we believe may be useful or informative. We do not take responsibility for links to third-party content or the accuracy of the content itself. Any links to third-party sites, or information therein, are not intended as and should not be interpreted by you as constituting or implying our endorsement, sponsorship, or recommendation of the third-party information, products, or services found there. Please note: clicking on external links means you will be leaving this Website; you assume total responsibility and risk for your use of the site(s) you are visiting. Neither the information nor any opinion expressed constitutes a solicitation to use our services or to purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. HORAN and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.