A recent guide argues that plan sponsors should mostly pick passive over active funds in 401(k) plans — which may provide additional ammunition to plaintiffs’ attorneys in cases involving such plans, according to news reports.
Passively managed funds’ lower fees and more consistent performance are major advantages over their active counterparts, a new guide from the CFA Institute states, according to FA-IQ sister publication Ignites.
Meanwhile, the cost of hiring and firing active managers in an active fund puts them at a disadvantage, while it’s unclear whether any active funds consistently bring additional value relative to a given index or outperform their passive counterparts, according to the guide cited by Ignites.
“In both cases, the answer is decidedly mixed (to be charitable),” wrote Jeff Bailey, a senior lecturer in the finance department at the University of Minnesota and former senior director of benefits at Target Corporation, and Kurt Winkelmann, CEO of quant investment research at Navega Strategies, according to the publication.
Active funds also have a capacity constraint, while the performance of those that do beat the market needs to be constantly monitored, the authors write, according to Ignites.
Bailey and Winkelmann also wrote that offering “low-cost, transparent, and easily explained investment options … can provide much more long-term benefit to employees than managing a roster of actively managed funds,” according to Ignites.
Many Employee Retirement Income Security Act lawsuits filed in recent years — including suits against University of Maryland Medical System, John Hancock and TriNet — point to an abundance of actively managed funds inside 401(k)s as evidence of fiduciary imprudence, the publication writes.
And the CFA Institute’s guide may offer even “more fodder for plaintiffs’ attorneys targeting retirement plans in lawsuits over their selection of actively managed investment options,” Ignites writes.
“From a legal perspective it's probably safer to provide options that are passive,” said Geoffrey Sanzenbacher, a professor of economics at Boston College who wasn’t involved in the CFA guide, in an email to the publication.
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