Practical Applications of Active Management in Defined Contribution Plans

Practical Applications Summary

In Active Management in Defined Contribution Plans, which appeared in the Spring 2020 edition of The Journal of Retirement, Gerald W. Buetow, Jr. (of BFRC Services), Bernd Hanke (of Global Systematic Investors), and Maxim Zagonov (of Toulouse Business School) investigate the value of active management of defined contribution (DC) plans, given that many fiduciaries and most plan participants are not investment professionals. They find that for most DC fiduciaries, it is preferable to replace active US equity mutual funds with low-cost passive alternatives. They attribute this to three reasons: (1) the performance of active managers is inconsistent; (2) there are two levels of decision makers, fiduciaries and plan participants, which complicates effective active fund selection; and (3) the few consistently outperforming funds that exist tend to have higher tracking error, which makes asset allocation more complicated. Therefore, the authors argue, fiduciaries and DC plan participants should select passive rather than active funds.