401(k) plan want it to be suc-
cessful but just don't know how
They might depend on an advisor who
is versed in financial products but
doesn't specialize in 401(k)s or depend
on a direct relationship with a vendor.
There is a general discontent among
plan participants, but it's blamed on
"the market" or "the economy."
that will help your clients to maximize
the performance and effectiveness of
their plans, and you may be surprised
at how much impact they can have.
Investment Policy Statement (IPS).
for prudently identifying, retaining, and
monitoring the investments in your
plan. If you ask your clients for a copy,
you may be surprised to find that they
don't have one or, if they do, it's not
selecting a fund in the first place,
including historical performance, man-
ager tenure, and style consistency. If a
fund is competing in the large cap
growth space, for instance, are the
managers actually buying large cap
growth stocks? The IPS will also have
criteria for risk adjusted performance
Sharpe Ratio can help determine the
likelihood of future success. All of these
factors are then compared to other
funds in the same category, which ver-
ifies that the fund is among the "best in
breed" among its peers.
in this area dictate that this methodolo-
gy should be independent and not part
of a vendor-provided scoring system.
When the vendors' own scoring system
leads you back to its proprietary fund
list, it's prudent to get a second opinion
from an independent source, since it's
unlikely that any one fund family/
vendor will have all the best funds.
ing system to ensure that the high-
quality fund line-up you chose in the
beginning will continue to perform well.
With most funds, it's just a matter of
time before there is a management
change, a drop-off in performance, or
some other event that makes the fund
unattractive. A typical monitoring sys-
tem will track the progress of the fund
on at least a quarterly basis and show
you if a problem is developing. Poorly
performing funds will migrate to a
"watch list" so that they can be moni-
tored more closely, and there can be
discussions about possible next steps.
removing a fund. Usually this involves
several quarters, but it can also be
sudden, in the case of a manager
change or other event. If you as a CPA
can make sure that your clients each
have an IPS and can help them follow
through to this last area replacing bad
funds you can make a huge differ-
ence in their plans.
want to establish an independent
benchmarking system. Benchmarking
has been around for years in the
human resources area, and most of us
have been through a process of being
evaluated and benchmarked for per-
formance reviews and raises. In recent
years, this has also emerged as a tool
to quantify that trustees are indeed act-
ing "solely in the best interests of par-
ticipants" per ERISA.
used the same way in that it measures
a plan against other plans with the same
characteristics in terms of assets, cash-
flow, number of participants, number of
non-participants, average account bal-
ance, fees (both stated and unstated),
and much more. Some benchmarking
services will compare a company with
others in the industry, so a company can
see how it compares to its competition.
This can be especially useful in an