Reader Responses January 6, 2003

SURVEY SAYS: Removing an Investment Choice

June 13, 2002 (PLANSPONSOR.com) - A couple of weeks ago, we posed a question about investment policy statements and fund reviews - and that question has prompted another reader to ask - "There is a lot written and spoken about the duty to monitor (funds), but I wonder whether it has produced results, that is, whether funds are actually being removed and replaced." This week we asked readers "Has your plan ever removed a fund - and if so, why?"

Reported by

Nevin E. Adams

Well there may be some positive “bias” in our survey results, but I have to admit I was impressed. A whopping 87% of our respondents have removed funds at one time or another, for a variety of reasons. One reader noted “We’ve terminated MANY mangers for PPP: change in People, change in Process, lousy Performance (relative to peer group and benchmark).”

In fact, among readers who noted reasons, the most often cited was performance (53%), not just raw gains, but performance matched against an established benchmark or investment policy guideline. Roughly a third cited shifts in style, size or manager (which sometimes impacted performance), with about 12% citing lack of utilization by participants.

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“I have removed funds from
the 401(k) investment lineup.
The last time I did this I was
met with some very vocal
criticism from employees who
didn’t want to “sell [the old
fund]at a low.”I asked if they
wouldtherefore be in favor
of replacing the good performing
funds in other asset classes
with poorly performing ones to
“buy low.” Of course, the answer
I received was a resounding “no.”‘

More impressive?; The number of respondents who cited the use of an investment policy statement and/or regular review structure.

Not that those who hadn’t removed a fund weren’t inclined to do so. One reader noted, “I’ve been heading our Investment committee for the past 8 years, and so far, we have not replaced a fund. Times have changed though….We recently sent out a communication about a poorly performing fund and plan to add another in the same sector, to provide a better choice. That’s the easy part.Deciding whether to remove the poorly performing fund is more difficult. We don’t want to force participants to change funds, only to find out later that the “poorly performing” fund has caught fire, and is now a winner. As long as we have space in our program, and participants willing to invest in a fund, we will probably keep it. As with most benefit programs, it is harder to take something away, than to never offer it in the first place.”

Not that those who had taken the plunge had an easy time of it. For example, another reader said “Currently trying to decide what to do with the funds in our portfolio that have failed to meet the requirements. One fund that was a high flyer has a large proportion of plan assets. Policy says it should be pulled. Do you force participants to take a Realized Loss and prevent them from recovering their losses when this type of fund comes back into fashion? Sounds like a reason to sue, right?”

And then, there was this week’s EDITOR’S CHOICE : “I have removed funds from the 401(k) investment lineup. The last time I did this I was met with some very vocal criticism from employees who didn’t want to “sell [the old fund] at a low.” I asked if they would therefore be in favor of replacing the good performing funds in other asset classes with poorly performing ones to “buy low.” Of course, the answer I received was a resounding “no.”

Thanks to everyone who participated in our survey! And of course, you can check out more readerVERBATIMS.

The question was: Has your plan ever removed a fund - and if so, why?

THE VERBATIMS

Yes, we have replaced a fund. A few years back, we replaced the fund manager in our International category due to the fact that over the prior 18 months it had significantly underperformed its class. Employees didn't have to do anything as we have them enroll in generic fund names, which reflect the class of investment, and then when we need to change a fund manager, the funds get transferred automatically. Of course, we fully communicate, and they are given ample time to transfer their balances to other funds before the effective date of the new fund manager.

Yes, we have changed a number of our investments as of January 1, 2002. The Pension Committee which is the body of individuals who have the fiduciary responsibility to review, evaluate and make decisions on appropriateness of the investment within not only the 401K but the Defined Benefit plan. Each year there is a full review of the performance and quarterly we have a mini review if a investment is on the watch list for performance trends that do not meet the expectations of the plan.

We did replace 4 investments (International Fund, Mid-Cap, Small Cap & a Money Market Fund). Participants were notified at the beginning of October that these changes would occur during the last week of December. This gave the participants the opportunity to sell the current investment and place the money into another investment that was not slated to be removed. We have 12 investments and 4 were slated to be removed. If they chose to leave their money in the investment that was to be removed, it would automatically be mapped over to the new investment which had the same criteria. In other words, we liquidated a International Fund and replaced it with another International Fund, etc.

As with any change, not everyone was happy with the change or the choice in investment family. They always had a better idea. However, the Pension Committee was in full agreement that the review prior to and the selection of investments were the appropriate action to take.

As financial advisor to various 401(k) plans, we monitor the investments for our plan sponsors quarterly and provide a plan-year-end trustee report for all fund managers. We monitor 8 different criteria that range from manager tenure to style drift. In the last 3 years, we have removed approximately 6 funds and performed substitutions for at least another 3 asset classes. By following the IPS, we have been able to objectively suggest fund changes that have maintained the integrity of the original plan design.

We have just completed our most recent review of our funds, and yes we are pulling one fund and replacing it with a seemingly "better" choice. Primarily performance, but also fund manager changes that were deemed to be the cause of the "relative" poor performance.

I've been heading our Investment committee for the past 8 years, and so far, we have not replaced a fund. Times have changed though. Initially we had 3 funds, then 4, and relied strictly on the plan provider to monitor and manage the funds. We changed plan providers 3 years ago, and we are now much more involved in the whole process. The committee chose the funds (initially 12 and now 14) and monitors them regularly. We recently sent out a communication about a poorly performing fund and plan to add another in the same sector, to provide a better choice. That's the easy part.

Deciding whether to remove the poorly performing fund is more difficult. We don't want to force participants to change funds, only to find out later that the "poorly performing" fund has caught fire, and is now a winner. As long as we have space in our program, and participants willing to invest in a fund, we will probably keep it. As with most benefit programs, it is harder to take something away, than to never offer it in the first place.

Regarding investment fund changes, we evaluate funds based on their performance, management style, organizational changes, etc. We did replace three of our mutual funds in 2000 and added one new fund in 2001 and will replace at least one fund this year

Yes, due to underutilization of funds - brought in new options. we looked for gaps in style also, we added a "socially responsible" fund.

We are constantly monitoring out funds to make sure they are top performers. We have removed at least two funds in the last few years. One was removed because it became too big and we felt it wasn't able to perform as efficiently as it had when we first decided to include it in our plan. One was removed because it consistently under-performed and was downgraded to the lowest rating by Morningstar.

We have never removed a single fund. We did remove/change our fund administrator and by doing that removed all of that administrator's funds. The administrator had made a lot of administrative errors, but the funds were doing quite well.

Reviewing funds: Yes, absolutely! Our firm reviews performance on a quarterly basis. We have both internal and external financial advisors providing guidance and recommendations to the Trustees Committee. We have a "watch" list of any fund (we offer 24) which under performs for two quarters in a row. If it does not show significant improvement within the next two quarters (as measured against its peers) it will be replaced.

Last September we removed two funds from our list for exactly this reason and we were right to do so because both have continued to under perform. The important thing here is to have an excellent source for advice and analysis. Sometimes a fund will seem to under perform but, on closer scrutiny, simply be misclassified or undergoing a change in management style. We try to avoid knee-jerk reactions and do our research before we make a move. We offer at least two funds in every major investment category, so our participants always have choice and can move before we do if they feel it is appropriate. This keeps us from having to act too precipitously. Our strategy continues to prove solid - most of our funds outperform their peer group consistently and by a significant margin.

I have removed funds from the 401(k) investment lineup. The last time I did this I was met with some very vocal criticism from employees who didn't want to "sell [the old fund] at a low." I asked if they would therefore be in favor of replacing the good performing funds in other asset classes with poorly performing ones to "buy low." Of course, the answer I received was a resounding "no."

I could not help but suspect that the Benefits Committee and I were being set up for blame if, by chance, the old fund outperformed the new fund going forward. The claim would be that the participants lost money, or made less money, because we changed the fund lineup. Some rather saavy participants will endeavor to shift as much investment risk back to the plan fiduciaries as they can.

I believe the best defense is to have a clear investment policy and a solid analytical methodology for fund selection.

yes we've routinely replaced fund managers for underperformance and funds themselves if they seemed duplicative

Our company is currently in the process of eliminating one investment option from our 401-k plan. The decision was based on poor fund performance over the past two years, recent changes in fund manager and a change in the investment style of the fund manager. This action is a direct result of following the guidelines of our investment policy. Additionally, we are adding two additional funds.

We take our fund selection and investment policy seriously. Trustees meet at least once a year. Currently trying to decide what to do with the funds in our portfolio that have failed to meet the requirements. One fund that was a high flyer has a large proportion of plan assets. Policy says it should be pulled. Do you force participants to take a Realized Loss and prevent them from recovering their losses when this type of fund comes back into fashion? Sounds like a reason to sue, right?

Our solution is to leave it and add another fund in same class to give them another choice. If the fund had not been popular or as heavily utilized, we would have just pulled it and replaced it.

We have an Investment Committee who quarterly reviews the performance of funds in our 401k. We have added and removed funds on an annual basis since 1999. Parts are given a year's notice before the fund is eliminated as an investment option.

Yes we have removed a Bond fund from our 401(k) plan. We removed it because of performance. It produced average returns when we selected it for our plan but over the next two years it was in the 90th percentile (Morningstar) in performance so we pulled it.

Actually I am currently in the process of adding 5 new funds to our investment array. I have administered this DC plan since 1988 when it replaced the DB plan. In 1988 we offered 8 proprietary funds and a General Account. Since that time we have added 11 outside funds but we have yet to remove any. However, we are considering removing and/or replacing several funds before the end of the year.

We have replaced funds under our Investment Policy Statement for poor returns or excessive risk and not maintaining their asset style consistently.

Funny you should ask - we are in the process of removing a fund - Alliance Premier Growth. This fund has done relatively poor and has been down rated by Morningstar.

Yes, we've removed a fund and replaced it with a fund that looked to be a better producer. Great results!

We have removed funds from our plan.

Our company used to have 3 different company stock funds, all different securities. Participants could invest their own contributions without limit in these funds. When we sold company A to company B, we stopped allowing new money into the company A fund but allowed the fund to exist. About 6 months after the freeze stock A was converted to stock B and continued in the plan. When company B was bought by company C six months later, we decided to drop the fund rather than convert to company C stock. Company C is a foreign public company. We dropped it because the admin fees to make the change were big and therefore was not consistent with our investment policy, especially since the fund would only shrink in the future because we always allowed loans, transfers, and distributions out of the fund but no new money in. This fund was dropped and not replaced.

We also dropped the Yachtman Fund. The fund looked good for a number of years, but then headed south. The fund was dropped based on our investment policy. We gave several months notice to employees and told them to transfers their balances. At the closing, all remaining balances were transferred to the equity index fund. We concluded that the fund was not the same fund we originally selected. There were issues with diversification, manager's thesis, organization stability, and returns compared to appropriate index. This fund was dropped and not replaced.

Our attitude on dropping a fund was to use the investment policy's criteria to make the decision. We also wanted to give participants advance notice (multiple months) and ensure that no information about the fund was released until it was released to everyone (actives and terms) at the same time. We wanted to ensure that everyone had the same information at the same time to make their own personal decision.

We have also replaced funds, but they were very similar funds and were simply mapped to each other.

Yes, we have removed a fund from our offering selection as a result of the monitoring process, and plan has only been in place for 18 months.

It was removed because of poor performance and fund manager turnover.

The owners of our company have decided to cap the number of funds offered, because they feel the number of choices becomes overwhelming for the participants.

So when new funds are available, we sit down with our broker and look at her recommendations for removing funds, making sure we were providing an adequate balance of risk categories. We just started this procedure, so have not received any feedback yet from participants.

Sadly we have never removed nor added a new fund. I have been trying to get some action in the area of reviewing all funds at least once a year against an established criteria. I would love an investment policy that made sure we have at least one choice in each area of investing. So far all that has happened is one of the owners says he checked the funds we have against Morningstar's grading and we're in good shape.

Every time I hear that I want my name off anything to do with the plans.

We constantly monitor the performance of funds and replace them when we find a combination of some of the following: excessive style drift/ frequent changes in fund managers/ poor performance relative to other funds in the specific style.

We have removed two funds and replaced since we formulated our investment policy statement. We meet each quarter and review a scorecard of benchmarks and objective measures to determine if a fund is to be placed on a review status or a possible remove and replace if it continues to fail measurement indices.

We meet with our provider at least quarterly to review fund performance against our investment policy. We added 3 additional funds in late 2001 to better balance our investment alternatives, and we removed a fund in early May for failing to comply with the standards set by our policy (based on its rolling 3 quarter performance). We currently have 3 additional funds on a watch list, at least one of which is continuing to underperform and will most likely be removed following review of second quarter results in early July. We also will be evaluating additional investment alternatives to add at the same time.

We have terminated contracts with our investment managers on four occasions in the last ten years. We monitor our investment managers on a regular basis, and meet with them twice a year. Reasons for termination could be poor performance relative to their particular market index, a change in investment philosophy, new ownership that could interfere with our portfolio manager's investment strategies, or investing outside their disciplines.

Yes, we review the funds and their performance on a quarterly basis. Decisions are made to "watch" a fund that is under performing its benchmark, and there have been times that we have replaced that fund with another option. The decision is based upon returns and volatility of the fund compared to the established benchmark and other funds in that particular category.

Eliminating dogs is a painful process made more so by fanatics vociferously pressing their belief that what went down must go up. The 'shrills of failure' willingly dedicate this lifetime to their quest for 'the happening'. The frenzied chase of yesterday's hounds and the reluctance to cull the pack has resulted in our 24 'core options' plus a full service self directed brokerage account. I won't live long enough to cut the number of core offerings to a manageable 8-12 but I press onward towards that goal. Drab reality staying the course is no match for the immediate gratification of wishful thinking.

We monitor the performance of each Mutual Fund in our 401K Plan. This year we are discontinuing four Funds which were under performing the index and other funds in the same Asset Class. We replaced them with other Mutual Funds in the same asset class.

Yes, we have removed funds that (1) haven't lived up to their style or performance goals relative to their appropriate peers for some period of time, generally at least a year; or (2) are used by relatively few participants; or (3) were not able to unitize when we made the change to daily valuation - this affected some very popular funds but we were not willing to stick with quarterly valuation when the benefits of daily valuation were so obvious.

Our company has removed one fund from our plan in the last three years as participation in the fund was low and the performance results did not meet the plan guidelines.

Yes, we have removed funds which failed the metrics written into our Statement of Investment Policy. The metrics are based on the funds performance relative to both its benchmark and peer funds.

With 35 fund options, we have a specific tracking mechanism in place which flags funds for placement on a watch list. Without the mechanism, tracking them would be impossible.

The Committee who oversees the funds has final say as to whether the fund goes or not, but a decision must me made. The flagged funds are reviewed on a quarterly basis.

We've removed a fund for the combination of poor performance, lack of interested investors, and to allow us to add funds that expanded our participants investment options.

Yes, we have removed funds. We removed one for poor performance relative to its benchmark and to its peers over a long period (over 5 years). We removed another after an evaluation of our asset allocation policy and how each fund fit into it. We determined that one fund was significantly duplicated by other funds and replaced it with another fund that better completed our asset allocation objectives. We also decided not to replace a deep value manager during the tech stock run-up reasoning that we had hired the fund for its style and the manager had remained true to that style. Subsequent events vindicated that decision.

Most importantly we replaced our overall investment advisor because we felt his advice was trimmed too closely to what he thought trustees wanted to hear as opposed to what he might actually think himself.

Yes, we have replaced funds due to performance objectives not being met. We have also placed fund managers on watch due to management changes, acquisitions, reorganizations. This helps to keep the committee focused.

We have added 3 new funds and are removing 4 funds because of the due diligence required by our investment policies. New funds were added 5/29 and the older funds will be removed 60 days later, giving employees ample time to make the change.

We have removed three funds from our 401(k) plan offering. Two of them were removed because they no longer were in the top 50% percentile of their peer group and one because it had out grown it's Cap size. It grew from Small to Mid and our investment guidelines required a Small Cap growth option.

Yes, we have replaced 2 funds. Both were replaced due to underperforming their benchmarks as provided in our policy statement and guidelines.

We've terminated MANY mangers for PPP:
change in People
change in Process
lousy Performance (relative to peer group and benchmark)

"We" have not removed funds, but our provider has. They have taken out funds and replaced them with their own. As the years have gone by, more and more of their own funds have made it into our list of choices, as the alternative funds dwindle. One of the reasons we have dropped them as a provider as of the end of this month is the costs they are charging to manage their funds (and line their own pockets.)