Going passive is an active decision

There has been an increase in interest among defined contribution (DC) plan sponsors for passive investment options that seems to be, in part, based on the false premise that fiduciary oversight requirements are nearly eliminated. Plan sponsor fiduciary responsibility may not be reduced to the extent plan sponsors believe when selecting passive funds to include in their DC lineup.

While there are differences in evaluating passive and active funds, this paper details certain items plan sponsors are obligated to look at, when selecting passive investment options (including both single asset class and target date funds), by ERISA requirements of selection and monitoring of plan investments. The obligations detailed throughout this paper consider the sponsor’s duty to review the:

  • Index provider’s organization and methodology
  • Investment manager’s implementation capabilities
  • Investment manager’s fee structure
  • Lack of exposure for participants to asset classes that are expensive to implement passively
  • The structure of the target date fund glide path and underlying asset allocation
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