Los Angeles partner Fred Reish was quoted in a PlanAdviser article titled “Manager Changes and the Investment Policy Statement.” Recent analysis shows that, on average, there is no appreciable change in future performance expectations following a change in fund management. However, investors commonly overreact and pull money from these funds.
A recent study published by Morningstar finds that this phenomenon is partly driven by the fact that plan sponsor decision-making is often tightly controlled by an investment policy statement (IPS) prescribing certain actions that must be taken when specific triggers are met. For instance, a personnel change for a fund will often trigger the plan sponsor to put the fund onto a watch list. Once on a watch list, it may only take one or two quarters of slightly below-benchmark returns to lead to a fund’s potentially disruptive dismissal.
Fred urges plan sponsors to remember the IPS “is the committee’s document; you own it. Make sure it’s what you want. There aren’t any required provisions. It is there to help you, not hurt you.”
“Review the IPS once a year, and go through it item by item, to make sure the committee is following its terms and that it covers all the investment decisions that need to be made,” Fred said. “Committees are most often sued for the decisions they do not make—or, in other words, the issues they do not pay attention to. Make sure the agendas for your meetings list the decisions your IPS says the committee must make. And make sure that all of the necessary investment decisions are in the IPS—such as expenses, share classes, revenue sharing, quality of investment management, asset classes, company stock, brokerage accounts and so on.”