How a retirement plan chooses funds

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Cartographer
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Joined: Sun Aug 05, 2018 1:46 pm

How a retirement plan chooses funds

Post by Cartographer »

My 403(b) has a variety of TIAA and Vanguard funds available. I've noticed the composition of offerings has changed significantly (when I started a 2 years ago, I think there were only 4 funds with expense ratios under 10 bps, now there are many). And both the old and new compositions seem somewhat odd. In some cases, we have TIAA and Vanguard versions of the same fund (I mistakenly invested in two S&P500 funds not realizing they were essentially the same :oops:). But in others, only the TIAA fund or only the Vanguard fund. And we have a couple of actively managed funds from Vanguard, but other active Vanguard funds are missing

This got me wondering: How do retirement plans typically choose the funds they offer?

I assume its some sort of negotiation between the employer and provider. But I'm curious if anyone has any insight into how such negotiations lead to a weird mix of offerings with duplicates and holes.
Last edited by Cartographer on Fri Aug 31, 2018 4:52 pm, edited 1 time in total.
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nedsaid
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Re: How a retirement plan chooses funds

Post by nedsaid »

There is often a committee that determines the fund choices. In a big company, HR will do a lot of research and might even hire a consultant to help.
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daveydoo
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Re: How a retirement plan chooses funds

Post by daveydoo »

For the very small plans, I think employers choose whomever will do it for free -- i.e., no-to-minimal record-keeping fee and/or management fee. Plan then only includes high-ER funds that revenue-share with the custodian.

For your place, I suspect that there has been a historical relationship with TIAA and many employees would explode if they lost access to their beloved TIAA. That's how it is at my big employer, where I'm on the committee that looks at these things. There is some redundancy across custodians to keep the peace. Employees have been getting savvier so we've had success marginalizing the expensive custodians. And some the adherents age out, too.

Like a lot of big employers, in the wake of all the ERISA lawsuits over too-high fees and poor plan investment options, we contract with an outside consultant whose niche is helping companies pick investment vehicles and custodians for retirement plans.

Our ship has been easy to steer -- we've swapped TIAA target-dates for Vanguard, for instance, and I've had some success getting some low-ER index funds added where an asset class had been under-represented. Our team is very sharp -- I love to just listen to the quarterly market updates. There's no forecasting, of course, but there's sufficient editorializing that it's entertaining. A business-savvy co-worker confided on the way in, "This is the only meeting on my calendar that I look forward to."

Note that these consultants use different metrics than you or I. We would prioritize lowest ER, usually index, decent track record and asset base. They seem to prioritize not getting sued -- so there is a somewhat byzantine formula that is designed to react to any conceivable red flag including short-term performance, manager tenure, etc. -- anything that could make an angry employee come back waving a piece of paper complaining about poor stewardship.

Ask around -- there might be a committee you can join. Ours is designed to represent all employee classifications, bargaining units, etc. Only two or three of us actually ask questions; most in the room are rubber stamps.
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livesoft
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Re: How a retirement plan chooses funds

Post by livesoft »

I was on a 401(k) committee that helped select funds. The process went like this:

1. The Fidelity advisor suggested a set of actively-managed moderate expense ratio funds in several asset classes.

2. I suggested a set of passively-managed low-expense-ratio index funds in the same asset classes.

3. The other committee members just nodded their heads.

4. The path of least resistance was to have both sets of funds in the plan.

5. Done.

Basically, in order to have the company pay the minimal amount of fees to have a 401(k) plan, Fidelity needed to collect fees from the participants in the form of 12b-1 fees included in the actively-managed fund expense ratios. They knew that most participants would not use index funds, so they did not mind a few index funds in the line-up.

The fund selection committee should follow a written Investing Policy Statement, too.

Other considerations that could apply: Folks hate to change anything, so if some funds have been in the 403(b) /401(k) for years and years even if they are terrible funds, they will not be ditched if a significant number of participants use them. Conversely, if some funds have almost no one invested in them, then it is easy to ditch them.
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ishkadetto
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Re: How a retirement plan chooses funds

Post by ishkadetto »

livesoft wrote: Fri Aug 31, 2018 4:26 pm Conversely, if some funds have almost no one invested in them, then it is easy to ditch them.
I'm curious.. how does that work, knowing which funds are being used by the employees?

Does the 401k committee (or the individual business owner if there is no committee, as I think is the case for my spouse- participant in a very small 401k with less than half a million in funds total) get a breakdown of this from company holding all the funds (Vanguard, John Hancock, etc)? Is it possible for the plan participants get this type of detailed info too?
fortyofforty
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Re: How a retirement plan chooses funds

Post by fortyofforty »

My experience with a 403(b) from a couple of decades ago mirrors what was written above. One high-cost financial company agreed to do all the record-keeping, perform all the routine maintenance, and provide all plan materials and brochures for employees. The owner of the non-profit company would not consider changing to a lower-cost option, as he was comfortable with the handholding provided to him by company representatives and, frankly, Vanguard was not very "employer-friendly" at that time. Vanguard essentially said, "this is what we have to offer, and if you want it, do all the work and apply". Options in the plan did start to get better (relatively), with some passive funds included in the offerings. I'm not sure what happened after my friend left the company.
daveydoo
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Re: How a retirement plan chooses funds

Post by daveydoo »

ishkadetto wrote: Fri Aug 31, 2018 5:13 pm I'm curious.. how does that work, knowing which funds are being used by the employees?

Does the 401k committee (or the individual business owner if there is no committee, as I think is the case for my spouse- participant in a very small 401k with less than half a million in funds total) get a breakdown of this from company holding all the funds (Vanguard, John Hancock, etc)? Is it possible for the plan participants get this type of detailed info too?
Yes and yes. Just ask HR. I see it every quarter and I'm just a lowly drone from sector G.
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livesoft
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Re: How a retirement plan chooses funds

Post by livesoft »

ishkadetto wrote: Fri Aug 31, 2018 5:13 pm
livesoft wrote: Fri Aug 31, 2018 4:26 pm Conversely, if some funds have almost no one invested in them, then it is easy to ditch them.
I'm curious.. how does that work, knowing which funds are being used by the employees?

Does the 401k committee (or the individual business owner if there is no committee, as I think is the case for my spouse- participant in a very small 401k with less than half a million in funds total) get a breakdown of this from company holding all the funds (Vanguard, John Hancock, etc)? Is it possible for the plan participants get this type of detailed info too?
I suppose it will depend on the firm doing the 401(k), but we got analytics every year with all kinds of stuff. To some extent anyone can read the Form 5500 filed with the government that is found online. I often look up what my spouse's 401(k) plan has shown in the annual Form 5500. But I will say that the analytics that we got had a lot more than the 5500 did.
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