Plan sponsors that rely on passively managed investment options as a hedge against fiduciary liability may be operating under false premises, according to analysts at Russell Investments.
In the wake of a decade's worth of 401(k) class-action litigation, fee-conscious sponsors have outfitted investment lineups with passively managed mutual funds and target-date funds.
While awareness of fees is a welcomed development, the misperception that passive investments eliminate fiduciary obligations is dangerous, write Kevin Knowles, an analyst on Russell's defined contribution team, and Josh Cohen, head of the institutional defined contribution team at Russell.
"If you decide to implement passively managed investments in your DC plan, your job as a fiduciary is not over," write Knowles and Cohen.
"Every decision you and your hired managers make is an active decision that has implications and requires prudent review, even if implemented through passive investment vehicles," they say.
In fact, some monitoring requirements are unique to passively managed investments.
Passive index funds are built on data from index providers—Russell is one, the Standards and Poor and Dow Jones indices are others.
Sponsors must consider the provider of that data when vetting funds, say the analysts.
Sponsors should also be aware that sometimes index fund managers will change their index provider, as Vanguard did in 2013 for several of its indexed equity funds.
Such changes could affect fees, the construction of funds and their ultimate performance.
