Retirement Plan Due Diligence?

December 13, 2010 4:52 AM

I'm going to be a part of a due diligence team speaking to the Manhattan financial services firm that manages the retirement plan for a mid-sized company. What should I know before going in? What should I listen for? What should I ask?

I plan to mostly listen, as I'm not an investment professional. I've tried to be a student of the markets over the last few years, but hopefully these haven't been typical years, and in any case I recognize that there's a difference between personal and institutional investing.

Much of the meeting will likely focus on "alternative strategies" in emerging markets.

posted by anotherpanacea to work & money (10 answers total)

is this for a DB or DC plan? Is it allocation or manager selection?
posted by JPD at 5:17 AM on December 13, 2010

ETA: Are you using a consultant? How did these meetings come about?
posted by JPD at 5:19 AM on December 13, 2010

If you think of a question, ask away... your job (as I understand it) is to sniff out anything that might be wrong, and prevent losses.

If you don't understand something, make them explain it.

I can't believe your boss didn't give you better info about what they expect your role to be.
posted by MikeWarot at 5:44 AM on December 13, 2010

If you think of a question, ask away... your job (as I understand it) is to sniff out anything that might be wrong, and prevent losses.


This is oversimplifying things a bit, but it is headed in the right direction. If its manager selection you've already decided you are going to invest in that asset class, so there is no reason to discuss "why this class" Instead you want to focus on their Investment Process, and the narrative of their past performance - both the good times and bad times. Actually performance itself is less important than you probably think it is (but still very important - especially 5 years +)

The Ideal manager is someone with good long-term performance, mediocre or (even better) shitty near term performance, institutional stability (both personnel and process), and a willingness to have very frank discussions about anything and everything when it comes to those things. Why'd this guy leave. Why given your process didn't you do better here? Or even better - why did you do well here when someone in your style should have underperfomed.
posted by JPD at 6:27 AM on December 13, 2010

This is the annual "due diligence" meeting for a defined contribution plan. We'll be hearing "pitches" from a number of different funds seeking investors.
posted by anotherpanacea at 6:41 AM on December 13, 2010

So basically its something like Fidelity is the administrator for the 401k and they've pre-selected a bunch of managers for you to choose from? I wouldn't worry so much about fraud then - those guys have pretty ferocious DD before they get approved. Just focus on how they generate their returns.

(I don't think a DC plan should have an EM Alternatives option)
posted by JPD at 6:56 AM on December 13, 2010

I'd rather not say which firm it is, but it's not Fidelity.

I don't think a DC plan should have an EM Alternatives option.

How come?
posted by anotherpanacea at 7:05 AM on December 13, 2010

I gave that as an example. Fidelity and Vanguard at the 500 lb gorillas, and the one thing that is a huge threat to their business is fraud. In my experience that can be generalized to all of the big firms when it comes to the DD process. I'm generally super cynical about wall street, but in this case your interests and the agents interests are pretty closely aligned. (only wrt to the fraud issue though)

Why no EM alts? Too expensive fee wise, too complex for the employees. hidden leverage. Too much emphasis on choosing the "right" manager. Basically alpha is a charade, and an EM Alts fund is going to be trying to be an alpha generator rather than picking a flavor of market risk and running with it.

I'm a big believer in DC options being an array of very low cost passive funds. I think its reasonable to offer an EM option - but why not an EM credit index and EM equity index.
posted by JPD at 7:15 AM on December 13, 2010

Designing a DC plan is a delicate balance. You want enough options so that people can approximate what they want to do with their money, but at the same time you don't want to make it easy for them to absolutely blow themselves up.

It isn't really your job to force an investment policy on the plan members. I mean I think EM in any form is a terrible investment right now, but I would think a DC plan that didn't offer them as options was suboptimal.
posted by JPD at 7:27 AM on December 13, 2010

My plan doesn't include any precious metals.... I could have been stacking up Silver Eagles for 5 years now otherwise... 8(
posted by MikeWarot at 9:41 AM on December 13, 2010