blending active and passive post preceded by LRPC's Plan Sponsor Insight image.

Many 401k plan participants are convinced that active management, where fund managers attempt to beat benchmark index returns, no longer works. They prefer to have low cost, passively managed or index options available in their 401k plans. Given the high degree of correlation between investments post-crash, being 100% invested in passive funds would probably have been a smart strategy.

Most experts believe it is not likely that markets will remain as highly correlated in the future. Recently the folks at BlackRock, the largest asset manager in the world, shared research that indicates that blending active and passive choices is probably best for most 401k plans.

When Selecting Active Funds, BlackRock Recommends

 

Look for broad market mandates

Regardless of whether you are considering an actively managed fixed income, equity or real assets fund, search for funds that provide the manager with a broad market mandate. Fund managers that can search a broad swath of the market for promising opportunities are more likely to outperform.

 

Use actively managed funds for asset classes difficult to index

It makes sense to offer index fund options in some asset classes because it is difficult for a fund manager to find or take advantage of inefficiencies in those classes. U.S. large cap equities (value, growth, and blend) are examples of asset classes where it would seem active management would have a difficult time beating passive. However, other assets classes like commodities and international equities, have enough inefficiencies to allow skilled fund managers to outperform.

 

And you should also keep in mind

Plan participants should be aware that they need to hold active funds through a full market cycle. Many active managers outperform when markets fall. Remember, the biggest negative in using passive investment options is that investors experience 100% of all down market moves.

 

When Selecting Passive Funds, BlackRock Recommends

 

Select passive options for efficient asset classes

In those asset classes where active managers have very little chance of beating a benchmark, passive investment options should be offered. Examples include U.S. large cap asset classes.

 

And you should also keep in mind

Use passive options when good active options aren’t available. For example, it may be hard to find a good actively managed U.S. equity mid-cap fund. In those instances, consider using an index fund.

 

The next time you review your investment menu, make sure you are offering an appropriate balance of active and passive mutual fund options to your participants.

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About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.