Search

How Often Should I Be Changing Investments (As a Plan Trustee)?



As a 401(k) plan trustee---or fiduciary, plan sponsor, or employer sponsor---your role is to provide a plan that serves your participants’ best interests. From the participants’ point of view, one of the variables they care most about is what investments are available for them to invest in? And that creates a significant question for you, the trustee, to answer: how often should you evaluate the plan and, if merited, change the investments available?


Nothing is Set in Stone, But...


Every plan is different. Every employer, every industry, every set of participants is different. And thus, there is not a hard-and-fast rule regarding the frequency of changing investments in a 401(k) plan.


However, there are best practices. Here is one of the most important: a plan trustee should never leave the decision up to subjective choice or subjective timing. “It feels like it’s time” or “This investment feels like it’s doing poorly” are unacceptable reasons to change investments in the plan.


Instead, plan trustees must set up an objective system for monitoring the investments in the plan and an equally objective rulebook for removing or adding investments to the plan. These systems and rules should be set in place before any decisions about investments are ever made and typically come in the form of an Investment Policy Statement (IPS).


At Sage Rutty, we recommend you monitor your investment choices quarterly. We use Fi360’s tool to grade investments, and we keep watch lists of investments that have had questionable performance recently. We also have objective criteria for replacing investments.


Why Are Systems and Rules Important for Replacing Investments?


As the plan’s trustee, you have a responsibility to act in your participants’ best interests. In most cases, that is a fiduciary responsibility, meaning that negligence is not an excuse for incompetence. There can be legal ramifications for mistakes and poor choices.


So, imagine you need to justify the plan’s investment choices to a participant, their attorney, or a court. You will need to justify each fund in the plan, how you chose it for the plan, and why it has stayed in the plan.


An objective system of rules is an excellent justification. Each investment is in the plan because it met the objective standards of the plan. You cut investments from the plan because they failed on rules and no longer met the objective standard. It is cut and dry and clean.


Summary


We recommend that your plan revisit its investment choices every quarter. We also recommend that you make decisions based on an objective system of rules. Not only will this serve your participants better, but it will also help protect you from legal action.