Fiduciary Review and Compliance

As a plan sponsor for a qualified retirement plan, you have a fiduciary obligation to ensure the interests and well-being of all plan participants are first and foremost in mind. This is true from everything including plan design to investment offerings to participant education.

American Law Institute:

The basic premises of prudent and successful investing are incorporated in Modern Portfolio Theory. As a result of this the American Law Institute amended the Third Statement of Trusts incorporating Modern Portfolio Theory, clarified the definition of a Prudent Investor under the Prudent Investor Act, and proposed that a Fiduciary who does not implement a passive strategy will have an obligation to justify such departure from the methodology.

Overview of Fund Selection and Review Criteria:

Performance: Fiduciaries are obligated to provide funds that provide comparable performance to the corresponding market or their peer group. The primary metric that fiduciaries use is to compare the performance of their individual funds and portfolios to the return of the market. The Solid Rock portfolios invest in the broad markets so their returns will be market returns. Therefore, by construction alone, these portfolios automatically satisfy this consideration. Further, when compared to the performance of active managers, the markets have historically outperformed approximately 70% of active managers in the US and approximately 90% of active international managers. Thus, a program that invests in the broad markets will, over time, be in the top 30% of active managers in the US and top 10% of active managers internationally with respect to performance.

Portfolio Turnover: Portfolio turnover affects the overall operational costs of a fund, the higher the turnover, the higher the operational costs, which would have the effect of reducing investment returns. The Solid Rock investment portfolios invest in the broad markets so portfolio turnover and the costs associated with such turnover are not a factor or consideration as the portfolio turnover is minimal.

Manager Turnover: Another factor that fiduciaries must monitor is manager tenure. In traditional Wall Street funds, the performance track record of the fund is truly the performance of the manager. Therefore, when a manager departs this direct relationship between fund performance and the active manager creates a strong reason to consider replacing the fund. The Solid Rock portfolios do not have this issue as the funds utilized invest in the broad markets and are not the result of an individual manager’s security selection or timing moves.

Style Drift: Another factor that fiduciaries must consider is style drift. Traditional managers will often stray from their stated investment objectives to make an attempt to achieve higher returns. This deviation from stated objectives can, and often does, cause significant straying from portfolio strategy. When this happens it is sometimes necessary to replace this fund/manager. Again, the Solid Rock portfolios do not have this issue or concern as the funds invest in the broad markets for their stated objective. Style drift cannot and does not happen in Solid Rock portfolios.

Expenses: A final consideration of fiduciaries is fund expenses. The Solid Rock portfolios are designed to minimize expenses. This is done by using no-load mutual funds with a strict adherence to low fund expense ratios. Further, being market-based funds, the Solid Rock portfolios are not subject to the same degree to other expenses that add to the cost of investing, including: turnover, transactions costs, cost of cash, etc.

Next, Model Portfolios