January 2016

Inside this issue:


As we enter the New Year, many qualified retirement plan sponsors use this time as an opportunity to examine current fiduciary structure and processes to ensure all is in order.

Whether or not your organization’s retirement plans have been recently audited by the Department of Labor and/or Internal Revenue Service, it is advisable to be sure your plans will hold up under such audit and/or plan participant scrutiny, and that the proper protections for the Company and its designated fiduciaries are in place.

When reviewing your current fiduciary structure, policies and procedures, we suggest the following considerations:

  1. If none exists, establish a formal internal Committee to include appropriate representative leadership members.
  2. Conduct fiduciary training to educate Committee members on their responsibilities under ERISA and attendant, personal fiduciary liability.
  3. Examine, assess and modify current processes - and be in a position to address and answer the following questions:
    • Does a written Committee Charter exist? If so, does it need to be updated to reflect the current structure, governance, membership, etc.?
    • Has each Committee member signed a written acceptance of his/her responsibilities?
    • Are regular Committee meetings held to review plan investments and administration?
    • How are decisions made and documented?
    • Are minutes kept to document and memorialize committee meetings, attendance, votes, actions, etc.?
    • Have previous authorized actions been executed (i.e., investment changes)?
    • Does the plan have a written investment policy? It is not required, but having and following one is considered the best practice.
    • Is fiduciary liability insurance, and/or a company indemnification provision, in place to protect the individual fiduciaries in the event of individual or class action civil litigation?
  4. Confirm all required, and related, plan documentation exists and can be easily accessed.
    • Plan document and amendments (fully-executed)
    • Summary Plan Description (SPD)/Summary of Material Modifications (SMM)
    • ERISA §404(c) disclosures and general compliance
    • ERISA §404a-5 participant fee disclosures
    • Favorable IRS Determination Letter
    • Service provider agreements/ERISA §408(b)(2) fee disclosures
    • Service provider selection/monitoring process and outcomes
    • Parties-in-Interest
    • Compliance testing results, and corrective action, if applicable
    • Government audit results, and corrective action, if applicable
    • Self-audit results, and corrective action, if applicable

Our belief is that with this review made and necessary corrective steps taken, plan fiduciaries will take comfort in knowing their collective fiduciary house is in order and will pass muster under government review, and plan participants will be assured that the Committee’s decisions and commensurate actions are being made with their interests in mind.

If you have questions about, or need assistance with, achieving this result, please contact your Plan Consultant.


There has been much publicity about active managers’ inability to beat their benchmarks over the years. However, upon closer inspection, funds that have remained truly active have shown ability to add value above their benchmarks. A study conducted by Yale professors Martijn Cremers and Antti Petajisto set out to find variables that could help predict fund performance. One variable was active share, which measures a fund’s percentage of holdings that differs from the benchmark index. For example, an index fund has an active share of zero percent and an active fund with no benchmark overlap has an active share of 100 percent. They found that active share is predictive of excess returns. Their study showed that funds with the highest active share outperform their benchmarks by 1.51–2.40 percent a year before expenses and 1.13–1.15 after fees and expenses.¹

The mutual fund industry has evolved over the last 35 years, from an environment where most fund managers had portfolios significantly different than their benchmarks, compared to today where many have high benchmark overlap. In 1980 only 1.5% of fund assets had active share below 60% compared to 40% of fund assets at the end of 2009. Additionally, share of mutual fund assets in very active funds (80-100% active share) decreased from 60% to less than 20% over that same time period. Closet indexers (20-60% active share) now make up about a third of mutual fund assets.² It is no coincidence that the cumulative excess returns of the median active fund peaked in the early 1980s and have steadily eroded with the proliferation of closet indexing.

The merit of active share is intuitive. If a fund is too similar to the benchmark it is trying to beat, the fund can’t generate enough excess returns to overcome fees charged to the investor. Furthermore, the key to outperforming over time is to consistently apply a well-defined process. If a manager has a well-defined process which seeks specific characteristics in a security, by definition it should produce a portfolio that is significantly different than the benchmark most of the time.

However, all active share is not created equal. Tracking error, which measures the variability of returns compared to the benchmark, is another important piece of the puzzle. Funds with very high tracking error tend to have large factor or sector bets that result in high volatility of returns compared to the benchmark. Cremers and Petajisto found that high active share managers that focused on stock selection within a diversified portfolio, while mitigating tracking error, had the best results. This group is represented by funds in the highest quintile of active share while excluding the highest quintile of tracking error. Funds with high active share and high tracking error and substantial factor bets were the worst performing sub group.³ In other words, managers who focus on stock selection as an alpha driver produced better results compared to managers that take large sector or factor bets.

Active share is just one factor to consider when selecting fund managers. Obviously, if a manager lacks skill and a sound investment process, high active share will only increase the risk fiduciaries are trying to minimize. Montgomery Retirement Plan Advisor’s Scorecard is in place to reduce this risk and help fiduciaries identify the skillful managers. Used in conjunction with high active share and moderate tracking error, the evidence suggests that active managers can add value.

¹ http://papers.ssrn.com/sol3/papers.cfm?abstract_id=891719
² http://www.cfapubs.org/doi/abs/10.2469/faj.v69.n4.7
³ http://www.petajisto.net/research.html



We’d like to boost the contribution levels of our plan participants. We added an employer match last year, but many employees don’t contribute enough to receive the entire match. What else can we do?

A: You’re not alone. In a study by Financial Engines covering 4.4 million participants in retirement plans at 553 companies, nearly 25% of employees did not contribute enough to receive the entire match in 2014. According to the study, employees missed out on $1,336 per employee. Financial Engines determined the total loss over 20 years for every plan participant is $42,855—a figure significant enough to get some attention.

Effective communication can be key to encouraging participation and contributions. Try a campaign targeted at those individuals who are not claiming the entire match. Let them know how much money they missed out on, and express it using a long-term view as Financial Engines did. Break it down even further by translating that lump-sum figure into a monthly income figure at retirement.

Sometimes people won’t fully engage no matter how you communicate. Those people may benefit from an auto-enrollment feature. But be careful you don’t enroll at a low rate. Research has shown that even when the automatic enrollment rate is 6% or higher, few people opt out. Aim high and track your results.

Review the report at http://tinyurl.com/FinEnginesMatch.


Consult your plan’s counsel or tax advisor regarding these and other items that may apply to your plan.


  • Send payroll and employee census data to the plan’s recordkeeper for plan-year-end compliance testing (calendar-year plans).
  • Audit fourth quarter payroll and plan deposit dates to ensure compliance with the Department of Labor’s rules regarding timely deposit of participant contributions and loan repayments.
  • Verify that employees who became eligible for the plan were given the opportunity to enroll.
  • Update the plan’s ERISA fidelity bond coverage to reflect the plan’s assets as of December 31 (calendar-year plans). Remember that if the plan holds employer stock, bond coverage is higher than for nonstock plans.
  • Issue a reminder memo or email to all employees to encourage them to review and update, if necessary, their beneficiary designations for all benefit plans by which they are covered.
  • Review and revise the roster of all plan fiduciaries and confirm each individual’s responsibilities and duties to the plan. Ensure that each fiduciary understands his or her obligations to the plan.

No strategy assures a profit or protect against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

For Plan Sponsor use only – Not for use with Participants or the General Public.This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. 

Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

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