Quantitative + Qualitative Due Diligence = Best-in-class Retirement Plans

December 13, 2023

Investment oversight is a top priority for employers to help them fulfill their fiduciary obligations as sponsors of retirement plans.1

When charged with creating and monitoring a well-diversified investment menu for employee retirement plans, employers have the fiduciary duty to ensure investment options are prudently evaluated, suitable and in compliance with the Employee Retirement Income Security Act (ERISA) and the U.S. Department of Labor regulations. Due diligence plays a key role in allowing retirement plan committees to move forward knowing they are satisfying fiduciary requirements and mitigating risk.

To properly meet fiduciary duties, retirement plan committees must:

  • Establish a diligent and documented process for selecting and monitoring investments to reduce noncompliance risk
  • Offer investment options vetted by a thorough due diligence process
  • Mitigate risk through enhanced investment oversight and holistic plan governance

5P Process Offers Comprehensive Due Diligence

USI Consulting Group (USICG) has developed a well-defined, repeatable, investment monitoring process that thoroughly evaluates investments — quantitatively and qualitatively — including investment oversight and holistic plan governance.

Referred to as “5P,” the process serves as a tool for effectively monitoring investments, including identifying investment options that provide the greatest probability that retirement plan objectives will be met in a manner consistent with established constraints and guidelines. The 5P process helps employers make educated decisions about investment strategies through rigorous asset manager research, including:

  • Quantitative and qualitative analysis
  • Active and passive strategies
  • Alternative asset classes
  • Environmental, social and governance strategies

While it’s important to conduct a thorough quantitative review of past manager performance and skill, USICG believes plan fiduciaries should consider additional qualitative criteria to understand the underlying forces of manager performance. The 5P process evaluates a broader set of factors including:

5p-1.pngAn evaluation of the leaders of the investment strategy and the ability to attract supporting talent
5p-2.pngExhibits a clearly defined investment thesis which can be exploited for the benefits of investors
5p-3.pngConsistent execution of and adherence to the defined investment thesis
5p-4.pngA validation of the investment thesis through sustained favorable investment performance
5p-5.pngA viable investment vehicle and pricing structure for investors

USICG evaluates managers within this framework through in-person meetings, virtual meetings, investment forums and on-site visits at a fund manager’s office. This comprehensive analysis uncovers factors that aren’t revealed through a purely quantitative approach, including:

  • A shift in culture at the firm
  • A pending manager departure
  • A change in supporting resources

Combining this qualitative analysis with a quantitative review of the investment manager provides a well-defined and comprehensive due diligence process. The 5P process:

  • Empowers employers to make informed decisions and act in the best interest of plan participants by following a systematic due diligence process
  • Positively impacts participant outcomes through suitable investments with competitive returns
  • Involves comprehensive documentation of the investment analysis that can serve as a resource for audits
  • Manages risk through active monitoring of the investments to identify material factors that may require adjustments to the lineup
  • Helps retirement plan fiduciaries construct investment menus that reflect their organizational goals and philosophy
One of USICG’s distinguishing characteristics is that we are unbiased as to the managers who you select for your investment program. We are searching purely for the highest quality manager to meet your investment mandate. We believe this is a key difference in an environment where some advisors may be unduly influenced by proprietary investments or favorable compensation arrangements.

It’s Time to Consider Fiduciary Liability Insurance

Fiduciary errors related to improperly managing investments and making imprudent investments can cost retirement plans millions of dollars. Allegations that plan fiduciaries failed to exercise appropriate fiduciary oversight have become more commonplace. In fact, there have been more than 200 ERISA class action lawsuits filed since 2015, far outpacing prior years.

In addition to the 5P process, employers can create additional stability for their companies by transferring certain risks through the purchase of fiduciary liability insurance. Fiduciary liability insurance protects an organization and any individual fiduciary (directors, officers, employees and administrators) of a company’s employee benefit plans in the event they are sued. The insurance covers defense expenses, settlements, judgments and penalties arising from claims alleging:

  • ERISA violations
  • Errors and omissions in the administration of employee benefit plans
  • Breaches of duties in the selection of investments, investment advisors and other service providers
  • A failure to follow plan documents
  • Excessive fees depleting the value of retirement plans

Through our parent company USI Insurance Services, we have a team of fiduciary liability insurance experts to help provide peace of mind by securing appropriate levels of fiduciary liability insurance to protect employers and individual fiduciaries. In addition, our team can:

  • Prepare a client for underwriting questions
  • Discuss emergent risk areas
  • Benchmark the limits of liability, retentions (deductible) levels and premium ranges of peer companies

Case Study: Cost savings and reduced risk

USICG’s 5P process paid off for an information technology company headquartered in the Southwest. Through several mergers and acquisitions, the company’s retirement plan assets had grown significantly, and investment management and advisory expenses had not been effectively monitored, resulting in excess costs. USICG employed the 5P process and developed a solution that included:

  • Drafting a new investment policy statement (IPS) for the plan
  • Providing independent professional advice on the selection of plan investments based on comprehensive due diligence, seamlessly moving the plan to a mutual fund platform
  • Conducting ongoing independent periodic investment reviews, in person and virtually, to support the new IPS

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1 Source: Callan Institute 2021 Defined Contribution Survey.

2 Actual results will vary. The use of any stated benefits in this case study is intended for illustrative purposes only and may not be used to predict or project future results.

Investment advice provided to the Plan by USI Advisors, Inc. Under certain arrangements, securities offered to the Plan through USI Securities, Inc. Member FINRA/SIPC. Both USI Advisors, Inc. and USI Securities, Inc. are affiliates of USI Consulting Group.

This information is provided solely for educational purposes and is not to be construed as investment, legal or tax advice. Prior to acting on this information, we recommend that you seek independent advice specific to your situation from a qualified investment/legal/tax professional. | 1023.S1129.0092