At some point, all good plan fiduciaries are going to make a change in their investment menu. It may be a simple replacement of a poor performing fund, or it could be a complete overhaul of the investment menu as they transition to a new recordkeeping provider. Each time a change is made, the plan fiduciaries are taking discretion of participant investments by moving participants money from one investment option to another, and as a result, they should give careful consideration of their decision. In my experience, there are typically three paths that plan fiduciaries can consider when making an investment change. No single path works in every scenario, so the plan fiduciaries need to weigh the pros and cons of each option based on their specific circumstances.
Option 1 – Like Fund Mapping
With this option, plan assets invested in the fund being removed are mapped to a new, similar fund that is being added to the investment menu (or may already exist). To determine a like option, most plan fiduciaries consider a third-party categorization system such as those provided by Lipper or Morningstar. For example, if the fund being removed is categorized as a Foreign Large Growth fund by Morningstar, the assets will be mapped to a replacement Foreign Large Growth fund.
This is the simplest and most common mapping strategy, and I expect that when most people think of mapping investment options this is the scenario they envision. It is easy to communicate to participants the change and given the high correlation of funds within a given investment category; plan fiduciaries can safely assume that they are not dramatically changing the risk profile of a participant’s investment portfolio. While simple and low risk, this scenario is not always available as an option for plan fiduciaries.
Option 2 – Map to Broadly Diversified Asset Class Option
In some cases, a plan fiduciary may not elect to offer a similar replacement for a fund being removed from the investment menu. They may make this decision for any number of reasons. For example, they may wish to simplify the investment menu by reducing the number of funds that are available to participants, eliminating risky asset classes, or removing asset classes that they believe are highly correlated with other options within the menu. Over the past few years this has been a common decision for our 403(b) clients as they have decided to transition from investment menus that offered hundreds of proprietary funds to a simpler menu consisting of open-architecture investment strategies. Even among 401(k) clients, the trend has been to reduce the number of investment options in order to make the investment menu easier to manage for participants.
When there is no like option being offered as a replacement, many plan fiduciaries will seek to map to a similar, but more broadly diversified investment choice. For example, if a plan is removing a utilities sector fund, the plan fiduciaries may choose to map the fund to a more broadly diversified investment option with similar characteristics to the fund being removed. In this example, that may be a large value fund because of the value-like tendencies of the utilities sector or it may be a broad-based U.S. equity fund. Most commonly, when we see this option used, plan fiduciaries are using a low cost, broadly diversified index fund as the alternative.
Option 3 – Map to Qualified Default Investment Alternative (QDIA)
In some cases, options 1 and 2 do not work well for the situation, and the plan fiduciaries elect to map plan assets to the qualified default investment alternative. Options 1 and 2 tend to work best when the number of changes is limited, making communication to participants easier. When the number of changes is more significant, the plan fiduciaries may elect to map all impacted plan assets to the QDIA. In most cases, the QDIA is an age-based target date fund series, and participants’ assets are mapped based on their specific age.
This option can be attractive because it is simple to communicate to participants and because it results in many participants achieving a more diversified portfolio appropriate for their time horizon. It also carries the least risk or a mapping mismatch, because the QDIA carries the protections provided under the Pension Protection Act. Additionally, in many cases, participants have made investment choices that leave them either too conservative or too aggressive for their time horizon, and they fail to monitor their portfolio, adjusting it as their circumstances warrant. Mapping them into the plan’s QDIA can result in them having a better portfolio and one that will continue to adjust as they approach retirement.
Too often, plan fiduciaries discuss the major investment changes, but do not take the time to discuss and decide on the most appropriate transition scenario. Ultimately, there is no single mapping strategy that works for every scenario. The right decision for you will depend on your specific circumstances, your participant population, and the preferences of your investment committee. If you would like help or want to discuss mapping strategies further, feel free to contact a Multnomah Group consultant.
Our Fiduciary Training resource focused on fund mapping is another great resource for retirement plan committees on this topic.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.