Keys for an Advisor Developing a 401k Fund Lineup

The business owner is normally wearing many hats beyond their key business function and faced with a number of decisions as a plan sponsor in administering a 401k plan not limited to plan provider selection, regulatory filing and testing, fiduciary compliance, and participant communication. Yet another key activity is engaging professional investment advice, whether helping the participants through a digital solution or choosing an investment advisor or consultant to create a fund lineup.

In the case of the fund lineup, the plan sponsor selects an investment advisor to decide which funds to offer their participants through the 401k-plan offering. Several factors influence this choice. First are the demographics of participants. The industry experience has been with most 401k plans, that there is usually a concentrated group of participants (typically between 5-10% of the population) who are actively managing their investment balances and utilizing plan-specific and other readily available online tools to research leading funds, and in some cases, the more popular funds denoted by industry rankings, Kiplinger’s, Forbes,….etc. They monitor their balances closely and are the most vocal through feedback on the choice and performance.

The business owner or sponsor retains an advisor as a fiduciary to make the best recommendations although plan economics for supporting plan features and administrative needs is a key driver. In the early years, the focus was on actively managed funds that has transitioned to passive funds with the growing sophistication of plan participants and fee awareness. Through their transparency and cost-efficiency, ETFs are slowly working to find their way into the fund lineup. 

It goes without saying that fund costs are another major consideration of the investment selection process. It is more prevalent today for a plan sponsor to pass on the actively managed, headline funds with higher fees for the lower expense funds. It is a constant challenge delivering a competitive benefit program with a limited corporate budget.

First, the advisor will engage the plan sponsor in an interview or through a questionnaire to determine the fund selection based on demographics, exchange activity, contribution rates and matching considerations. An advisor will create screen accessing fund databases or analytical tools looking at factors including the track record of the fund manager and fund management company, AUM size, the fund’s risk and performance compared to its peer group and relevant benchmarks, and the investment objectives in alignment with the risk profiles established from employee demographics and participant account behavior.

Next, the advisor will typically construct a list of 10-15 fund families and a list of 20-25 funds that will meet the criteria established in conversations with the plan sponsor. The expense ratio is only one consideration and the advisor must create an array to satisfy the spectrum of participant’s risk capacity and life stage. The single, newly graduated specialist supporting a sales group will be looking at a different outcome than the manufacturing floor engineer who has 15+ years with the company and married with 3 children.

For the advisor, if this is not their specialty, it becomes a time-consuming task that is supported as an accommodation for an existing relationship and typically not compensated at their standard management fee schedule. To narrow the recommendation list with pressure to select the lowest fee funds, even with traditional tools, it is a less efficient process with added responsibility compared to their mainstream advisory business.

Portformer can help the advisor streamline this oversight and selection and improve the evaluation of the available investment options within a plan – creating better outcomes for the sponsor and participants. While economics will continue to be a key driver, the advisor can quickly evaluate the existing options and create a proposal to guide the plan sponsor in making more effective investment choices to meet changing demographics and balance the cost consideration.

John DiBenedetto

Sales | Business Development | Customer Success

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