Ryan Mullen, CIMA, ARPC
MFS Senior Managing Director
Check the headlines of many news and industry trade publications lately, and there is a lot of buzz about fiduciary responsibility as it relates to retirement plan participants. While acting in the best interest of participants is an ongoing commitment for plan sponsors, it never hurts to make sure they're honoring it.
Taking a big step back and looking holistically at risk is a good place to start. It's important to assess and prepare for a range of potential investment risks, rather than focusing only on what the prevailing market brings to bear. It's easy to get myopic when a particular risk is front and center. In the present environment of ultra-low interest rates which will no doubt head back up at some point, interest rate risk is certainly top of mind.
But there are many other investment risks lurking — whether driven by geopolitical concerns, liquidity issues or currency fluctuations. What plan sponsors want to avoid is getting caught off guard by risks that they don't see coming. That type of surprise could inadvertently jeopardize their participants' retirement outcomes and call into question whether the plan sponsors are fulfilling their fiduciary responsibilities.
Activate the core
That's why it's so important to have active risk management at the core of a plan's investment lineup. Skilled active managers1 consider risk throughout their investment process, continuously assessing and working to manage it at the security, portfolio and firm level. They understand how to potentially mitigate the impact of market volatility brought on by interest rate risk. They monitor portfolio liquidity carefully and are mindful of the declining liquidity for bonds. And with the ability to put analysts on the ground in markets around the globe, they can assess the risks and understand the forces that could impact local investment opportunities.
Managing plan risks is a fundamental part of acting as a plan fiduciary, and the regulators clearly agree. In recent years, the prevailing focus has been on fees — in an effort to minimize the impact of fund expenses on participant returns. And while we agree that lower fees are generally in the best interest of participants, choosing investment options purely based on costs is not. That is particularly true when the lowest cost option does not employ an active risk management approach.
In our view, with investment management fees coming down significantly over the past decade, it is entirely possible for plan sponsors to add skilled active management to their core lineup, at lower cost than in the past and with potentially broader opportunities than index funds alone. According to the Investment Company Institute, over the past decade, the average expense ratio of actively managed equity funds has declined 21 basis points.2
With participant protection front and center from a regulatory perspective, there is a lot more riding on the investment decisions made by plan fiduciaries. Given the many possible investment risks associated with retirement investing, due diligence shouldn't stop at dollars and cents. It should be an active decision to guard against risk and operate in the best interest of plan participants.
1 MFS defines "skilled active managers" as those who show one or more of the following behaviors:
- demonstrate conviction through low portfolio turnover and high active share;
- add value in volatile markets;
- integrate research and reward collaborative thinking.
2 ICI Research Perspective, May 2014