- The most obvious mistake - this is not your field of expertise! The mistake: Not hiring a registered investment advisor fiduciary (RIA), that is a retirement plan specialist, that takes full responsibility for selecting the funds including avoiding all the mistakes I am about to list. Sometimes Brokers (registered reps) and RIAs can make these mistakes - we seem them on plans we're analyzing regularly. When the funds are selected by the RIA with discretion, it's described under ERISA section 3(38). Delegating to an expert is a very smart fiduciary move!
- Not providing the lowest cost share class possible. Related: When the lower cost share class is not able to be accessed, not documenting why.
- Providing individual funds that are high volatility. They should be provided only inside of a “do it for me” option that is overseen by an RIA.
- Not providing enough passive low cost funds to construct a diversified portfolio.
- Too many funds. You want diversification. If a participant allocates across funds that overlap, they achieve concentration, the opposite of diversification. Much of the angst in 2000-2009, the “Lost Decade”, was due to investors placing their assets in overlapping large US cap funds which follow the S&P500 which was down over the ten year period of the "Lost Decade".
- Removing actively managed funds from the lineup based solely on recent poor performance or adding actively managed funds to the lineup based solely on recent excellent performance. This points out the fundamental problem that active funds pose for plan fiduciaries. Their selection is very difficult to justify. Quite often when an active manager performs poorly relative to others, their performance turns around in the next time cycle and visa versa. If you follow active funds relative performance over time, you find that they bounce up and down in the rankings seemingly at random.
- Using funds that have restrictions (in fine print) that allow the fund to arbitrarily restrict trading of shares if they wish.