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Rather than attempting to randomly pick successful funds from a massive list, have your group’s financial advisor create model portfolios for you to select from, which display options based on risk profile.   

Over the past few months I’ve been uncovering what goes on inside independent EP group retirement plans and how to fix some common problems. To recap, the first problem was that many group retirement plans hire service providers – including financial advisors – who are not fiduciaries and are not required to place the interests of plan participants first. The second problem was poor transparency of plan and investment product fees due to the bundled nature of most plans.

Let’s assume that you’ve addressed these problems. There are just a few more important considerations to get your group retirement plan in tip top shape.

Model Portfolios
In your current plan, you’ve probably got a list of mutual funds to pick from. Your group’s financial advisor and service provider usually choose those funds. The question now arises “Which funds do I invest in?”

This is where many investors shoot themselves in the foot, especially if you’ve got dozens of funds to choose from. I’ve seen plans which offer a hundred or more funds that participants can choose from. The problem with this many choices is that usually many of them overlap. For example, instead of offering just one fund that invests in ALL stocks within an investment class, you’ll be offered eight funds which invest in the same investment class. It gives the illusion of diversification. Owning 30 funds in your account might make you feel better, but you probably don’t understand what you’re doing. There’s really no reason to offer more than about 10-15 funds in your lineup, with each fund investing in a different investment class.

Furthermore, the financial advisor to your plan now becomes just a minion to the fund companies since his only advice is to circumferentially tell you which fund or funds you should invest in without knowing your entire financial situation.

Another problem is that this approach assumes that plan participants have the requisite knowledge to appropriately select funds that are in their best interests. It’s now up to you to decide which of the funds in the menu you should use for your retirement portfolio. It also assumes that you have the discipline to stick with an investment plan through bad markets rather than dumping some funds when you’ve lost money in those funds. With not even a golden hour devoted to this in medical school and residency, how do you solve this dilemma?

The financial advisor to your plan should be creating model portfolios for you to select from instead of simply giving you a list of mutual funds for you to pick by playing “eeny, meeny, miny, moe.” Each model portfolio should have a different risk/return relationship so that you should be asking “How much risk should I take?” rather than “Which funds should I use?” And the advisor should be educating you on how to determine the amount of risk you can take.

Let’s take a look at how model portfolios work. Suppose you have three funds offered in your lineup: Fund A which invests in US stocks, Fund B which invests in international stocks, and Fund C which invests in bonds. Instead of determining which of those funds to invest in, you could instead choose among model portfolios such as in figure 1. Moving from left to right, risk declines as the allocation to Fund C (a bond fund) increases. Notice that each model has exposure to all 3 investment classes but in different proportions and therefore varying degrees of risk. By creating these types of model portfolios and assuming the funds used in the models own the entire investment class, when you login to your retirement plan account, you simply choose which model suits your risk appetite. This frees you from deciding which funds to use. In my opinion it probably makes you a more disciplined investor since you’ll focus on the performance of your portfolio – the model – rather than each particular fund in the model.

If you want ultimate flexibility then create model portfolios in addition to offering each fund in the model as a stand alone option. That way it appeases everyone in your group.

Investment Committees
Having more committee meetings in your group might feel like a waste of time,  but a group investment committee is essential. This committee should consist of the following members: the financial advisor to your plan, the trustees of your plan (usually one or two physicians in your group), and at least one more partner in your group. The first task of this committee is to form a written investment plan called an investment policy statement for the group’s retirement plan in close conjunction with the financial advisor.

In the investment policy statement, you must first give a brief overview of the underlying investment philosophy you will use and the evidence to support that philosophy. You should then list the specific mutual funds which will be offered in the plan and explain how those funds were chosen over other alternatives. The risk and return characteristics of the model portfolios should be listed and how you constructed those models. The committee should meet every 6 months – once at the beginning of the year and once in the middle of the year – to discuss performance of each fund in the models and the performance of the models over the past 6 months. Performance should be listed next to appropriate benchmarks. Realize that if the funds in your lineup already own the entire asset class, poor performance of a few funds does not necessarily reflect poor fund manager decisions. Instead it reflects poor performance of the asset class itself and should not be a reason to dump one fund and replace the fund with another one. Replacing a fund should be a rare event if you’ve properly chosen the funds to begin with.

A good advisor will take the lead during these meetings to reinforce the investment philosophy and educate members of the committee about relevant investment topics to make sure plan participants stay disciplined during market turmoil. Since new mutual funds are introduced periodically and fees within funds change, the committee should annually review lower cost fund choices than the ones offered in your current lineup.

By making sure you hire a fiduciary advisor and service providers, unbundle your plan structure, create model portfolios with broadly diversified low cost funds, and write an investment plan, your group’s retirement can maximize the chance of a successful long term investment experience for plan participants.


Setu Mazumdar, MD practices EM and he is the president of Lotus Wealth Solutions in Atlanta, GA www.lotuswealthsolutions.com

 

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