The investment offerings within an employee-directed defined contribution plan should be made so that all appropriate asset categories are represented by at least one investment option. In asset classes that represent the largest percentage of dollars (large cap US equity is 44% of DC assets according to the 2001 P & I study) it would not be uncommon or unwise to offer a number of funds representing different investment styles. This array of options should be non-overlapping so that every participant can build a uniquely diversified portfolio representative of his or her individual time horizon and risk tolerance.
The Plan Sponsor and consultant should begin by identifying the appropriate asset classes that could potentially be offered within a given plan. The following information will be reviewed with the Plan Sponsor to help determine the correct number of core funds, both actively and passively managed:
demographics of the workforce,
educational levels,
risk tolerance,
Plan demographics, and
corporate culture and communication levels
This up front study will also lend itself to determining the ability for Plan participant to “digest” specialty fund offerings or the demand for asset allocation funds (lifestyle funds).
As a general philosophy, we do no believe there is any “best” fund. Some funds are most certainly better than others and some funds can clearly be classified as inferior. What AFS tries to identify is an “appropriate” fund, which meets the criteria we have determined as important.
One of our core competencies is the calculation of vendor revenue which may include items such as 12b-1 fees, sub-transfer agent fees, finders fees and billed items. We understand that as a Fiduciary you are expected to ensure that only “reasonable” compensation is paid to vendors that support your Plan. We not only tally all the invoiced items and revenue sharing dollars but we also compare this revenue to the costs associated with your Plan. Unlike other consultants, we present the whole picture and calculate not only revenue but vendor profit margins. This ensures you maintain a cost-competitive Plan year over year without having to waste your time re-bidding the Plan at the expiration of each contract cycle. In addition, we support your negotiations with fee / cost information, vendor service standards and benchmarking.
