Nick Ventura, CFP®, CPWA, CEO and President, Ventura Wealth Management
Everyone wants retirement to be easy. Whether watching television ads or thumbing through a financial magazine or paper, different mutual fund companies, brokerage houses, and annuity providers tout the safety, security, and ease of use of their products. The ideas presented seem simple: give us your money, and you can live “worry free” for the rest of your years. The problem, though, remains: creating a comprehensive retirement plan (and a corporate retirement vehicle) demands a significantly more complex process.
On top of coordinating various parties to design an appropriate corporate retirement plan, choosing a high quality plan provider, and providing plan participants with ongoing education, plan sponsors and advisors must select a lineup of suitable investment options. With new mutual funds, ETFs, and annuities coming to market at a rapid pace, performing due diligence on these various vehicles presents an increasingly time-consuming and burdensome task. Consequently, both plan sponsors and advisors need to maintain a professional, documented system for selecting investment options.
It remains important for those involved in the selection of investment options to understand both the qualitative and quantitative aspects of these vehicles besides simply relying on a third party analysis of different funds (Morningstar, Lipper, etc.). The fiduciary obligation reasons that parties involved in the selection process have a thorough understanding of the investments, and do not merely “rubber stamp” the inclusion of an option because a plan provider said that it “should be” part of the lineup. This is how many proprietary (read: lower quality and unnecessarily expensive) options often work their way into corporate retirement plans.
Performing a side-by-side analysis of funds using quantitative data points such as expense ratios, Sharpe ratios, assets under management, and turnover ratios is fairly easy – providing that those analyzing different investment options understand these relatively complex concepts (as anyone who ever worked through a Sharpe formula can attest). Quantitative analysis can be conducted on many platforms and allows sponsors and advisors a level of diligence when selecting investment options.
Without debate, the piece of information most plan participants focus on is fund performance. People love to ask the question, “How did I do?”
Performance is not only a function of quantitative factors; the analysis of qualitative data is significantly more difficult to incorporate. Factors including manager tenure, firm quality, and team structure all impact fund performance. For example, the manager of a fund which our firm used widely in our corporate retirement plans recently passed away. Since he acted as a solo manager and not part of a team, we deemed it an unacceptable risk to maintain assets with the fund. We decided the risk of keeping participant money with an unproven manager seemed too high. Qualitative data points, though not easy to obtain, play an equally important role in understanding the underlying dynamics of fund performance.
In an attempt to herd investors into “suitable and appropriate” investment options in the retirement space, plans use a wide variety of “target date” or “lifestyle” funds. These QDIA (qualified default investment alternatives) options are designed to give plan participants a diverse, all-in-one portfolio at the simple click of a mouse. If only it were that easy.
Though the operation of these vehicles is straightforward, their practicality remains questionable. Target date funds become more conservative the closer a plan participant gets to retirement, while lifestyle funds invest according to an investor’s stated risk profile – conservative, moderate, aggressive, etc. The assumption is that those investing in a target date fund (for illustrative purposes, one hoping to retire in 2035), all have the same exact risk profile and, therefore, should have the same exact investments. The idea behind lifestyle funds is that all aggressive investors should have the same holdings, regardless of their ages. The problems here become manifold. Many of these portfolios, target date and lifestyle, remain static and do not change allocations based upon external market factors. They adopt a “set it and let it” mentality which can do significant damage, particularly in market downturns. Any student of behavioral finance can tell you that when markets experience periods of higher volatility, investors are more likely to make an irrational, emotional decision – compounding the impact of the downturn.
Our firm advises plan participants on strategic asset allocation. It is critical for plan participants to look at their retirement accounts as a whole and not just as individual pieces. As plan advisors and plan sponsors work together to select high quality options, participants must form those options into a strategic asset allocation. We encourage plan participants to take a more active approach in selecting investments for their retirement accounts by utilizing our DART (dynamic, asset, rotation, and timing) system. DART, in effect, highlights which asset classes are entering an outperformance stage and those classes which are entering a phase of underperformance. This allows plan advisors and plan participants to work together to design an asset allocation for the current investment environment – not a theoretical one.
Building a dynamic corporate retirement plan requires two key steps. First, plan sponsors and advisors should use both quantitative and qualitative tools to determine high quality investment options for plan participants. Second, the advisor must educate and actively work with participants to ensure that asset allocation strategies stay timely and are correctly aligned with stated investment goals. Unfortunately, no “one stop” answer exists in creating a successful retirement plan. But education, collaboration, diligence, and active management together can help achieve retirement goals by limiting exposure to unnecessary risk and volatility.
Nick Ventura and Dan McElwee compose the executive team at Ventura Wealth Management, an independent RIA firm. Together, they focus on portfolio management and creating dynamic retirement plans for corporations and individuals.