Far too many companies rush into the implementation phase without having placed the ground work from Organize and Formalize. If that’s the case, please consider rebooting your process and including the foundational steps found in Audit, Organize and Formalize. For a great implementation phase, use the IPS as your guide and these three components for a solid prudent process:
Plan sponsors and stewards should only engage professional investment managers that score well in the above criterion. We encourage any person in a fiduciary role to get advice and support when making these decisions. Nothing here is “set it and forget it” and the investment committee should be constantly aware of the changes in the behaviors and performance of the underlying investments. Benchmarking your fees, and performing the constant due diligence is essential to maintaining a successful plan and upholding your duty as a fiduciary.
- Service provider due diligence
- ERISA safe harbors
- Investment selection
Recommended Due Diligence Criterion for Choosing Asset Managers
The below list of ten screens are recommended minimum thresholds for the InStep® clients. They traverse the topics of tenure, and track record, but also compare the investments relative to their asset class and risk profile. The idea is to create an academic approach to investment analysis that is repeatable and transparent and can be used to justify decision making for any asset class:| Screen | Reason | Minimum Acceptable Threshold |
| Regulatory Oversight | Strong institutional processes | Managed by a bank, insurance company, registered investment company or RIA |
| Minimum Track Record | Larger sample size | At least three years history |
| Manager Tenure | Part sample size, part stability | Tenure of at least two years and a contingency plan |
| Assets in the Product | Scale and efficiency | At least $100 million |
| Holdings Consistent with Style | Avoids style drift | At least 80% |
| Correlation to Style or Peer Group | Avoids style drift | Consistent with asset class being implemented |
| Expense Ratio | Fees | Fees relative to peers | Lowest quartile of peer group and always below 200bps |
| Performance Relative to Assumed Risk | Quantitative performance to risk | Compare Alpha, Sharpe Ratio, and Treynor Ratios to peer group median |
| Performance Relative to Peer Group | Quantitative performance to return | Compare year performance to peer group median |
| Percent of active share | Expose possible Index alternatives, avoid closet indexing | More than 50% active share |
| Batting Averages | Aggregate scores | Batting averages in top quartile |