Conrad Siegel Offers Tips for Retirement Plan Investment Lineups

Retirement plan consulting firm Conrad Siegel has an Insights article titled, “The Do’s and Don’ts of your 401(k) fund lineup.” Although the article is directed at 401(k) plans, it offers insights for 403(b) plan sponsors as well.

The firm first suggests that a plan’s investment committee should have a conversation about the overall goals of the investment menu, discussing what funds make up the lineup and how many funds are offered. Once goals are established, they should be documented in meeting minutes or the Investment Policy Statement (IPS). “Documentation serves as a great way to keep existing committee members on the same page and help bring new members up to speed,” the firm writes.

Conrad Siegel contends that most participants are looking to defer the investment diversification decision, so plan sponsors should make it easy for participants to have a well-diversified portfolio. They should understand the difference between risk-based and target-date funds (TDFs) and select the one that’s most appropriate for participants. However, not all participants want an “easy” option; some want to create their own portfolio using the plan’s standalone menu of funds. The firm warns that giving participants a choice does not mean they should be overwhelmed with a large amount of options, so plan sponsors should look to keep the menu concise by not offering multiple funds in the same asset class.

According to the Conrad Siegel, retirement plan sponsors should always consider costs of the funds, and they should consider whether they want to offer index or non-index funds or both. “Low cost, broadly diversified index funds make a lot of sense in a retirement plan. Rounding out the menu with a few non-index funds may also be appropriate if you have more sophisticated participants looking to create their own portfolio,” the article says. The firm reminds plan sponsors that decisions should be made in the best interest of participants.

Plan investment committees should have an outlined process for selecting investments, but Conrad Siegel also points out that fund selections should be monitored periodically. However, there should be a valid, well thought out and well-documented reason for making changes. “Participants can lose confidence in the committee and the retirement plan if changes are being made consistently without explanation or perceived benefit,” the article says.

Finally, the firm says retirement plan sponsors should use the lowest-cost share class for which the plan qualifies, and warns that plan sponsors should not assume providers are doing this for them.