It’s good to occasionally shake things up—with wardrobes, hairstyles and (apparently) investment menu options.
An all-star research trio of Morningstar’s David Blanchett and Jim Licato, along with the American College’s Michael Finke, took a look at what happens when sponsors remove and replace certain fund options in their plans.
“A plan sponsor evaluates the quality of mutual fund investments offered to plan participants, and occasionally decides to replace one fund with another,” they write. “Despite the importance of this monitoring activity, we know little about whether adding and deleting mutual funds from a plan menu is valuable for participants (or for investors in general).”
Not surprisingly, they find that “on average, replacement funds had better historical performance and lower expense ratios, along with more-favorable comprehensive metrics such as the Morningstar Rating for funds and the Morningstar Quantitative Rating for funds, than the funds they replaced.”
The largest performance difference
The largest performance difference, they add, in the replacement and replaced funds is the five-year historical returns, “suggesting this historical reference period is the one that carries the most weight among plan sponsors.”
“We also find that the future performance of the replacement fund is better than the fund being replaced at both the future one-year and three-year time periods, and that these differences are statistically significant,” they conclude. “Our findings suggest that monitoring plan menus can have a positive impact on performance.”
- A SUMMARY GUIDE OF THE REPORT CAN BE FOUND HERE: Change Is a Great Thing
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
