Open Plan applies a multi-level disciplined methodology to the investment fund selection process. Our goal is to create meaningful investment diversification for plan participants across all primary asset classes, so step one is to insure that each asset class is represented in the fund lineup.
Step two is to provide the highest quality of fund choice within each asset class, based on fund investment direction, management style, performance and fees.
Other factors may influence the fund selection process. We consider the demographics of the plan participants, prior investment history of plan participants and any plan sponsor preferences and needs.
Following is a brief summation of the steps taken during the development of an Open Plan suggested fund lineup. The major objective for Open Plan in every case is to provide the “best fit” fund lineup for each plan sponsor and the plan participants.
Asset Class Range
We begin the fund selection process by including investment funds from primary asset classes and investment management styles (often called Style Boxes). This is the most important foundational step, since performance is so heavily driven by asset allocation. In their landmark study “Determinants of Portfolio Performance,” financial analysts Brinson, Hood, & Beebower tracked the effect of the three primary activities that compose the investment management process in 91 separate pension plan portfolios:
Asset Allocation (included asset classes and weightings),
Market Timing; and
Security Selection (active vs. passive management).
They found that the asset allocation decisions were responsible for an average 93.6% of the total investment returns. Because of this fundamental significance, asset allocation considerations receive uppermost importance in the Open Plan fund selection process.
Use of the Morningstar Style Box™
Open Plan utilizes publicly available independent third-party investment data in the fund selection process. One of our primary resources is the independent investment research company Morningstar, Inc. The company has been the standard source of investment information and mutual fund analysis since 1984.
The Morningstar Style Box™ was introduced in 1992 to help investors and advisors determine the investment style of a fund. The Style Box™ is a nine square grid that classifies securities by size along the vertical axis and by value and growth characteristics along the horizontal axis.
Initial Style Box™ Range
An initial Open Plan Style Box™ range would typically include:
Domestic Equity
Size: Large, Mid and Small Cap
Management Style: Value, Blend and Growth
Stable Value Fund (conservative, fixed fund that doesn’t typically fluctuate in value)
Intermediate Domestic Bond
Foreign Stock
Real Estate
Based on specific needs, some plan sponsors may also want to include sector, theme or specialty funds on their lineup.
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Funds Inside the Asset Classes
The initial Asset Class Range provides ample potential diversification of participant assets. Additional diversification can be achieved through the fund choices within each Asset Class. This typically involves a comprehensive suite of low cost index funds combined with some historically attractive actively managed funds.
Active vs. Passive Funds
Open Plan can provide a unique package of both actively managed and passive (index) funds. Historically, it has been difficult for active fund managers to outperform comparable index funds on an ongoing basis. One of the major factors contributing to these results is the differential in management fees. Passive fund managers typically have substantially lower management fees.
Open Plan evaluates active fund managers in consideration of both their peers and comparable passive funds. This fund selection procedure intends to ensure that actively managed funds included in the suggested fund lineup have historically justified the additional fees associated with the active fund management approach.
Target Date Funds
Since asset allocation is so important to investment performance, Open Plan often includes Target Date Funds as investment options. Target Date Funds appeal to participants who are uncomfortable making investment decisions because as asset allocation funds they set the asset mix (stocks, bonds, and cash equivalents). Also, they automatically reset this asset mix according to a selected time frame that is appropriate for a particular investor. Each fund has an asset mix that is designed for someone planning to retire in the “target” year and the fund gradually adjusts its asset allocation to become more conservative over time. As the participant’s retirement date nears the target date fund reduces risk automatically. This is often called the “glidepath.”
When Open Plan includes target date funds in the suggested lineup, we prefer funds that are indexed based. This prevents potential “conflicts of interests” where a mutual fund family may have an internal incentive to incorporate their inferior funds into the target date fund’s asset mix. Also, sometimes the funds that the fund family includes in these target date funds may conflict with the underlying governing Investment Policy Statement for the plan. Some fund families don’t even offer all of the asset classes.
Share Classes
We use “institutional” share classes as often as possible. Unlike retail share classes, institutional share classes contain no revenue sharing for third-parties involved in fund marketing and distribution or plan administration. This practice allows for Open Plan’s totally transparent pricing and simple fee disclosure.
Quantitative Scoring
Open Plan applies a strict quantitative fund screening discipline in order to develop a well-rounded investment lineup containing best-in-class funds. Our screening process incorporates the fi360 Fiduciary Score™ Criteria comprised of eleven separate analytical and qualitative measures including consistent performance, expense ratio, appropriate volatility, style consistency, asset class balance and experienced management. Fi360® is an independent fiduciary analyst and founding member of CEFEX (Center for Fiduciary Excellence), a global initiative promoting Global Fiduciary Standards of Excellence.
Our initial review of actively managed funds has two screening priorities:
First, we look for funds that have performed in the upper 25% in comparison to their peers for one (1), three (3) and five (5) year periods.
Second, we look for funds that maintain their fi360 Fiduciary Score™ in the upper 25% in comparison to their peers for various time periods.
Qualitative Evaluation
Open Plan may also suggest appropriate funds in light of any strategic or tactical changes they may employ in order to enhance performance in various macroeconomic and market environments. As an example, this may include bond funds that change duration or quality in changing market conditions.
Investment Program Model Portfolios
Open Plan provides five separate diversified portfolios comprised of selected investment funds, the Investment Program Model (IPM):
Income Portfolio
Balanced Portfolio
Growth & Income Portfolio
Growth Portfolio
Aggressive Portfolio
Each IPM is treated like a specific investment fund, making it easy for plan participants to monitor the investment results of any selected IPM.
Fund Selection Documentation
At the time of Open Plan implementation, we provide you with a formal Due Diligence Report documenting the selection criteria and procedures utilized in the investment fund selection process. The Due Diligence Report becomes the initial benchmark for ongoing investment fund performance reviews and defines the fiduciary basis for investment fund selection.
See the Open Plan Investment Fund Due Diligence Process for a detailed description of the investment fund monitoring procedures employed by Open Plan on an ongoing basis.
