Institutional plan sponsors make lousy decisions

Institutional plan sponsors don’t know what the heck they’re doing when they make asset allocation decisions.

At least that’s the conclusion I’m tempted to draw after reading “Absence of Value: An Analysis of Investment Allocation Decisions by Institutional Plan Sponsors,”(subscription or membership may be required to access article) Financial Analysts Journal (Nov./Dec. 2009) by Scott D. Stewart, John J. Neumann, Christopher Kittel, and Jeffrey Heisler.

Plan sponsors’ poor product selection was responsible for most of the underperformance in the author’s study. As their abstract states, 

Results show that plan sponsors may not be acting in their stakeholders’ best interests when they make rebalancing or reallocation decisions. Investment products that receive contributions subsequently underperform products experiencing withdrawals over one, three, and five years. For investment decisions among equity, fixed-income, and balanced products, most of the underperformance can be attributed to product selection.

These poor decisions may be due to investment officers finding “comfort in extrapolating past performance when, in fact, excess performance is random or cyclical,” suggest the authors.

Should this research impact how plan sponsors manage their assets? I’d like to hear what you think.
Susan B. Weiner, CFA
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Copyright 2010 by Susan B. Weiner All rights reserved