Key takeaways:
- SPS evaluates investments using multiple factors rather than recent performance alone.
- The SPS Investment Committee considers short-, intermediate- and long-term results in relation to appropriate benchmarks and peer groups, along with risk measures and fees.
- Investments are reviewed at least monthly, with more frequent Investment Committee meetings during periods of heightened market volatility.
- SPS screens the broad investment universe available through the ADP platform and narrows potential alternatives through its evaluation process.
- Under the 3(38) arrangement, plan sponsors delegate investment-management decisions to SPS while retaining responsibility for selecting and monitoring SPS as their investment manager.
How does ADP SPS select retirement plan investments?
401(k) investment selection and monitoring requires more than identifying funds with strong recent returns. Performance is important, but it is only one part of a broader evaluation.
As a 3(38) investment manager, SPS has responsibility for selecting, monitoring and replacing investment options within the plan lineup. For the plan sponsor, that means investment-management decisions are delegated to SPS rather than handled internally.
That can be particularly useful for small-business owners and HR leaders who may not have investment specialists on staff. Many SPS 3(38) clients are sponsors of small retirement plans who choose to turn investment fiduciary responsibilities over to an experienced investment manager.
Performance and investment results
SPS evaluates performance over multiple time periods rather than focusing on a single quarter or recent market movement. The SPS Investment Committee considers short-, intermediate- and long-term results in relation to appropriate benchmarks and peer groups.
That broader view helps put short-term performance into context. Temporary underperformance does not necessarily mean an investment should be replaced. An investment manager may instead weigh shorter-term results against expectations for how an investment may perform across multiple market cycles.
Fees and expenses
Investment costs are another part of the evaluation. Fees and expenses can affect participant returns over time, so they are considered alongside performance and other investment characteristics.
The SPS Investment Committee regularly reviews fees for opportunities to lower investment costs. Cost, however, is one part of a broader assessment that also considers performance, risk and the role an investment is intended to play in the plan lineup.
Risk and investment strategy
Return alone does not provide a complete picture of an investment. Risk also needs to be considered.
SPS considers established risk measures, such as the Sharpe ratio, the Sortino ratio and upside/downside capture, to evaluate investment performance in relation to the risk taken. Other considerations may include asset allocation, investment style and historical volatility when determining whether an investment fits within the broader plan strategy.
The objective is to understand not only how an investment has performed, but also how its characteristics fit the role it is intended to play within the lineup.
Qualitative investment research
Not every factor that affects an investment can be found in a performance chart. Under its Investment Policy Statement, SPS also considers qualitative factors that may include:
- The experience and stability of the investment management team
- Whether the investment process is clearly defined and consistently applied
- The fund’s ability to remain open to qualified-plan investments for a reasonably foreseeable period
- Lawsuits, settlements or regulatory issues
- The stability, history, assets under management and industry reputation of the parent company
Objectivity is also part of the investment-selection process. ADP and ADP SPS do not offer proprietary funds that SPS is required to use.
How broad is the investment universe available to SPS?
SPS evaluates investments across a broad universe of options available through the ADP platform.
ADP has access to roughly 16,000 funds through its platform, and additional funds can be added when appropriate. SPS screens the available investment universe and uses those screens to narrow potential alternatives to a more manageable group for further evaluation.
SPS’s scale may also provide access to certain investment share classes that an individual retirement plan might not otherwise be able to access.
How does ADP SPS monitor retirement plan investments?
Investment selection is not a one-time decision. An investment that fit the needs of a plan when it was selected still needs to be reviewed as performance, costs, management teams and market conditions change.
The SPS Investment Committee meets at least monthly to review investments on the SPS platform. During periods of heightened market volatility, the committee typically meets more frequently, often every two weeks.
What does SPS look for during ongoing monitoring?
Many of the same factors used during initial selection remain relevant over time. SPS reviews short-, intermediate- and long-term performance against appropriate benchmarks and peer groups. Risk measures and investment fees are also part of the ongoing review process.
Qualitative developments may also warrant closer attention. Changes in the investment management team, investment process, organizational stability or legal and regulatory environment can affect how an investment is evaluated.
Looking at these factors together helps put market movements and short-term results into a broader context.
When might SPS replace an investment?
There is no single performance number that automatically determines when a fund should be replaced.
One of the most common reasons SPS may make a change is sustained performance that leads the Investment Committee to conclude that another option offers a better risk/return profile. Other quantitative and qualitative developments may also affect whether an investment continues to fit the lineup. When the review process indicates that a change is prudent and in the best interests of plan participants, SPS can act.
What happens when SPS changes a plan’s investment lineup?
Plan sponsors receive advance notice when SPS plans an investment lineup change. SPS notifies plan sponsors by email and through its website at least 60 days before the change takes effect. Participant notices are also provided at least 30 days in advance.
In addition to advance notices, plan sponsors receive information about upcoming investment changes in the quarterly SPS BluePrint Report.
This gives plan sponsors visibility into upcoming changes while allowing SPS to carry out the investment-management responsibilities delegated to it under the 3(38) arrangement.
How does SPS’s 3(38) role affect the plan sponsor?
Hiring a 3(38) investment manager changes who is responsible for making investment decisions, but it does not eliminate every fiduciary responsibility for the plan sponsor.
Under the SPS 3(38) arrangement, the plan sponsor delegates responsibility for selecting, monitoring and replacing investment options to SPS. The sponsor is not responsible for approving each investment decision SPS makes within the authority established by the investment management agreement.
The plan sponsor does, however, retain responsibility for appropriately selecting and monitoring SPS and ensuring that SPS is carrying out the responsibilities established in the investment management agreement.
For a small business without an internal investment committee or investment specialist, this can create a clearer division of responsibilities: SPS manages the investment lineup, while the sponsor oversees SPS as the appointed investment manager.
What should plan sponsors look for in an investment selection and monitoring process?
Whether evaluating SPS or another outsourced investment manager, plan sponsors should understand the process behind the investment lineup, not simply the funds that appear on it.
Questions to consider include:
- What factors are used to select investments?
- How frequently are investments monitored?
- How are performance, fees and risk evaluated?
- What can trigger a replacement?
- How are changes communicated?
- Who has final decision-making authority?
A clearly defined process can help plan sponsors understand what they are delegating and how their investment manager carries out that responsibility.
How can ADP Strategic Plan Services help?
Selecting and monitoring a retirement plan investment lineup requires ongoing research, analysis and judgment. For many small businesses, dedicating internal time and investment expertise to that work may be difficult.
As a 3(38) investment manager, ADP Strategic Plan Services assumes responsibility for managing the plan’s investment lineup, supported by a formal review process, ongoing Investment Committee oversight and access to a broad investment universe.
Learn how ADP Strategic Plan Services can help manage your plan’s investment lineup and investment fiduciary responsibilities.
FAQs
How does a 3(38) investment manager choose 401(k) investments?
A 3(38) investment manager may consider a combination of quantitative and qualitative factors, including performance, fees, risk, peer and benchmark comparisons, investment strategy and characteristics of the investment management organization. SPS uses multiple criteria rather than basing investment decisions on recent performance alone.
How often should retirement plan investments be reviewed?
Ongoing monitoring is an important part of investment management. The SPS Investment Committee meets at least monthly to review investments and typically meets more frequently, often biweekly, during periods of heightened market volatility.
Can a 3(38) investment manager replace funds without plan sponsor approval?
A 3(38) investment manager has discretionary authority over the investment responsibilities delegated to it under the investment management agreement. For SPS clients, that includes selecting, monitoring and replacing investment options within the scope of the arrangement.
What responsibility does the plan sponsor retain after hiring SPS?
The plan sponsor retains responsibility for appropriately selecting and monitoring SPS as its investment manager and for ensuring that SPS is carrying out the responsibilities established in the investment management agreement. SPS assumes the investment-management responsibilities delegated to it under the 3(38) arrangement.
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