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2016 ERISA Fiduciary Prudence Analysis
for
XYZ 401(k) Plan
INVESTSENSE
Wealth Preservation Counsel
Copyright ©2016 InvestSense, LLC. All rights reserved.
Explanation of Analyses
1. Top 10 401(k) Mutual Funds Active Manage...
Copyright ©2016 InvestSense, LLC. All rights reserved.
Incremental Costs and Returns
“Incremental costs and returns” refer...
Copyright ©2016 InvestSense, LLC. All rights reserved.
Impact of Each Additional 1 Percent Mutual Fund Fees/Expenses
10 Pe...
Copyright ©2016 InvestSense, LLC. All rights reserved.
Impact of Fees on Returns – Index Funds vs. Actively Managed Funds
...
Copyright ©2016 InvestSense, LLC. All rights reserved.
Comparative Impact of Loads and Fees on Returns
10% Return 0.20% Fe...
Copyright ©2016 InvestSense, LLC. All rights reserved.
2016 XYZ 401(k) Plan Mutual Funds Active Management Value Ratio™
Fu...
Copyright ©2016 InvestSense, LLC. All rights reserved.
The information provided herein is for informational services only ...
Copyright ©2016 InvestSense, LLC. All rights reserved.
2016 XYZ 401(k) Plan Mutual Funds Active Management Fee Factor™
Fun...
Copyright ©2016 InvestSense, LLC. All rights reserved.
The information provided herein is for informational services only ...
Copyright ©2016 InvestSense, LLC. All rights reserved.
2016 XYZ 401(k) Plan Mutual Funds AMFF-Adjusted Active Management V...
Copyright ©2016 InvestSense, LLC. All rights reserved.
The information provided herein is for informational services only ...
Copyright ©2016 InvestSense, LLC. All rights reserved.
2016 XYZ 401(k) Plan Mutual Funds R-Squared Ratings
The following m...
Copyright ©2016 InvestSense, LLC. All rights reserved.
2016 ERISA Fiduciary Prudence Correlation Matrix
(1) (2) (3) (4) (5...
Copyright ©2016 InvestSense, LLC. All rights reserved.
The information provided herein is for informational services only ...
Copyright ©2016 InvestSense, LLC. All rights reserved.
2016 XYZ 401(k) Plan Mutual Funds InvestSense Stress Test
Stress
Fu...
Copyright ©2016 InvestSense, LLC. All rights reserved.
2016 XYZ 401(k) Plan Mutual Funds Fiduciary Prudence Rating
Fiducia...
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2016 Master Fiduciary Prudence Analysis Top 25

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Earlier this year we posted an analysis of the top ten mutual funds used in defined contribution plans in 2015. Response was very strong, with requests for an expanded analysis This analysis covers the 17 non-index funds out of the top 25 funds used in DC plans in 2015 and designates those that would pass our fiduciary prudence screens.

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2016 Master Fiduciary Prudence Analysis Top 25

  1. 1. 2016 ERISA Fiduciary Prudence Analysis for XYZ 401(k) Plan INVESTSENSE Wealth Preservation Counsel
  2. 2. Copyright ©2016 InvestSense, LLC. All rights reserved. Explanation of Analyses 1. Top 10 401(k) Mutual Funds Active Management Value Ratio™ (AMVR) - A proprietary metric of InvestSense, LLC, the Active Management Value RatioTM allows investors and fiduciaries to perform a simple cost efficiency analysis comparing an actively managed mutual fund’s incremental/added cost to the fund’s incremental/added benefit. A low score is the goal. An AMVR score over 1.00 indicates that the fund’s incremental expenses exceed the fund’s incremental returns. 2. Top 10 401(k) Mutual Funds Active Management Fee Factor™ (AMFF) - A proprietary metric of InvestSense, LLC, the Active Management Fee FactorTM allows investors and fiduciaries to perform a simple cost efficiency analysis comparing an actively managed mutual fund’s incremental/added cost to both the fund’s relative active management component and its incremental/added return, if any. A low score is the goal 3. Top 10 401(k) Mutual Funds R-Squared Ratings – A metric that allows investors and fiduciaries to avoid unnecessary fees and expenses by identifying actively managed mutual funds whose returns show a high correlation of return with the appropriate index’s or benchmark’s returns. Mutual funds with high R-Squared ratings are often referred to a “closet index” funds, as their high R-Squared rating indicates that investors may be able to achieve similar or better returns at a significantly lower cost by using index-based investments. InvestSense classifies any mutual fund with an R-squared rating of 90 or above as a “closet index” fund. 4. Top 10 401(k) Mutual Funds Correlation Matrix - The cornerstone of Modern Portfolio Theory, correlation of returns data allows investors and fiduciaries to work toward the goal of reducing the chance of significant losses by combining investments with a low correlation of returns in hopes of stabilizing investment returns regardless of market and/or economic conditions. 5. Top 10 401(k) Mutual Funds InvestSense Stress Test™ – A proprietary metric of InvestSense, LLC, the InvestSense Stress Test™ measures a fund’s consistency of performance under various types of market conditions. A high score is the goal. 6. Top 10 401(k) Mutual Funds InvestSense Fiduciary Prudence RatingTM - A proprietary metric of InvestSense, LLC, the InvestSense Fiduciary Prudence RatingTM is a composite rating that allows investors and fiduciaries to evaluate a mutual fund based on a fund’s cost efficiency, risk management efficiency, and overall consistency of performance. A high rating is the goal. Only funds that qualify for a fiduciary score, based on the performance criteria, are listed.
  3. 3. Copyright ©2016 InvestSense, LLC. All rights reserved. Incremental Costs and Returns “Incremental costs and returns” refer to the extent that an actively managed mutual fund’s costs and returns exceed an appropriate index fund or benchmark. These incremental, or extra, costs and returns arguably represent the value-added aspect of an actively managed mutual fund, the additional cost or benefit derived from an investment in an actively managed mutual fund as opposed to a less costly index mutual fund providing similar or better returns. InvestSense believes that analyzing actively managed mutual funds on the basis of incremental costs and returns provides a truer and more useful evaluation of an actively managed mutual fund’s inherent value, or prudence, than the commonly used “gross costs and returns” in that it does not credit an actively managed mutual fund for the costs and returns of the passive portion of the fund, while at the same time assessing the relative cost efficiency or cost inefficiency, of an actively managed mutual fund. Based on our experience, the incremental cost of an actively managed mutual fund often significantly exceeds the fund’s incremental return, raising serious questions about the prudence of selecting and investing in such investments. In many cases we find that the actively managed mutual fund fails to underperform its appropriate index fund or other benchmark. In such cases, the analyses will show “NQ” to indicate such underperformance and a lack of a rating for such fund. In assessing the cost efficiency of an actively managed mutual fund, investors and fiduciaries may consider performing the following quick analysis. Fund ABC is an actively managed mutual fund with a five-year annualized return of 12 percent and an annual management fee of 1.0 percent. An appropriate index fund for Fund ABC has a five-year annualized return of 10 percent and an annual management fee of 0.20 percent. Fund ABC would have incremental costs of 0.80 basis points (0.80) and an incremental return of 2 percent. In other words, 80 percent of Fund ABC’s annual fee would only be producing 20 percent of the fund’s five-year annualized return before even factoring taxes and the impact of other fees/costs associated with the fund, e.g., turnover and brokerage fees/costs.
  4. 4. Copyright ©2016 InvestSense, LLC. All rights reserved. Impact of Each Additional 1 Percent Mutual Fund Fees/Expenses 10 Percent 9 Percent Difference Percent 10 Years $259,374 $236,736 $22,638 8.7% 20 Years $672,749 $560,441 $112,308 16.7% *Assumes an initial investment of $100,000.. The information provided herein is generic and for educational and informational purposes only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional service. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services. $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 10 Years 20 Years 10% Return 9% Return
  5. 5. Copyright ©2016 InvestSense, LLC. All rights reserved. Impact of Fees on Returns – Index Funds vs. Actively Managed Funds 9.8% Return 9% Return Difference Percent 10 Years $254,696 $236,736 $17,960 7.05% 20 Years $648,704 $560,441 $88,623 13.6% *Assumes initial investment of $100,000 and an annual return of 10 percent on two mutual funds having annual fees of 0.20%, and 1.0% respectively. The information provided herein is generic and for educational and informational purposes only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional service. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services. $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 10 Year 20 Year 9.8 Percent 9 Percent
  6. 6. Copyright ©2016 InvestSense, LLC. All rights reserved. Comparative Impact of Loads and Fees on Returns 10% Return 0.20% Fee 5% Load 1% Fee 5% Load+1% Fee 10 Years $259,374 $254, 696 $246,405 $236,736 $224,889 20 Years $672,749 $648,704 $639,111 $560,441 $532,419 *Assumes initial investment of $100,000 and an annual return of 10 percent, less any noted adjustment. The information provided herein is generic and for educational and informational purposes only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional service. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services. $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 10% Return 0.20% fee 5% Load 1% Fee 5% Load + 1% Fee 10 Years 20 Years
  7. 7. Copyright ©2016 InvestSense, LLC. All rights reserved. 2016 XYZ 401(k) Plan Mutual Funds Active Management Value Ratio™ Fund AMVR™ Vanguard PRIMECAP Admiral 0.18 Vanguard Windsor II Admiral 0.26 Fidelity Growth Company K 0.29 T. Rowe Price BluChip Growth R 0.58 Fidelity BluChip Growth K 0.62 T. Rowe Price Growth Stock R 0.96 Fidelity Contrafund K 2.28 American Funds AMCAP R-6 2.59 T. Rowe Price MidCap Gro R 35.20 American Funds Fundamental R-6 NA American Funds Growth R-5 NA American Funds Invest Co. R-6 NA American Funds Washington R-6 NA Dodge & Cox Stock NA Fidelity Low Price Stock K NA MFS Value R-5 NA T. Rowe Price Equity Income R NA (Based on data covering January 1, 2011 to December 31, 2015) Disclosure The analyses contained herein are based on past performance and information. While the information has been obtained from third parties believed to be reliable, neither InvestSense nor its owners, officers, directors and employees makes any representations as to its accuracy or assumes any liability for its accuracy, including, but not limited to, any damages resulting from reliance thereon. Past performance is no guarantee of future results. Information about and/or fees and other expenses charged by investment companies and/or on investment products are subject to change.
  8. 8. Copyright ©2016 InvestSense, LLC. All rights reserved. The information provided herein is for informational services only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional service. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services.
  9. 9. Copyright ©2016 InvestSense, LLC. All rights reserved. 2016 XYZ 401(k) Plan Mutual Funds Active Management Fee Factor™ Fund Stated Fee AMFF™ Vanguard PRIMECAP Admiral 0.34 2.00 Fidelity Growth Company K 0.77 2.33 Fidelity Low Price Stock K 0.69 2.38 American Funds Growth R-5 0.33 2.58 T. Rowe Price Growth Stock R 1.18* 2.59 Vanguard Windsor II Admiral 0.26 2.61 American Funds Washington R-6 0.30 3.02 American Funds AMCAP R-6 0.37 3.11 Dodge & Cox Stock 0.52 3.12 Fidelity Contrafund K 0.64 3.17 T. Rowe Price MidCap Gro R 1.28* 3.19 T. Rowe Price Blue Chip Growth R 1.24* 3.46 American Funds Invest Co. R-6 0.30 3.93 American Funds Fundamental R-6 0.31 3.99 American Funds Fundamental R-6 0.31 4.07 MFS Value R 0.51 4.40 T. Rowe Price Equity Income R 1.19* 5.85 *Reflects 0.50 bps 12b-1 fee added to T. Rowe Price R shares (Based on data covering January 1, 2011 to December 31, 2015) Disclosure The analyses contained herein are based on past performance and information. While the information has been obtained from third parties believed to be reliable, neither InvestSense nor its owners, officers, directors and employees makes any representations as to its accuracy or assumes any liability for its accuracy, including, but not limited to, any damages resulting from reliance thereon. Past performance is no guarantee of future results. Information about and/or fees and other expenses charged by investment companies and/or on investment products are subject to change.
  10. 10. Copyright ©2016 InvestSense, LLC. All rights reserved. The information provided herein is for informational services only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional service. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services.
  11. 11. Copyright ©2016 InvestSense, LLC. All rights reserved. 2016 XYZ 401(k) Plan Mutual Funds AMFF-Adjusted Active Management Value Ratio™ Fund AMVR™ Fidelity Growth Company K 0.85 Vanguard PRIMECAP Admiral 1.31 T. Rowe Price BluChip Gro R 1.33 Fidelity BluChip Growth K 1.66 T. Rowe Price Growth Stock R 2.18 Fidelity Low Price Stock K 2.25 Vanguard Windsor II Admiral 2.61 Fidelity Contrafund K 13.25 American Funds AMCAP R-6 14.15 T. Rowe Price MidCap Gro R 79.72 American Funds Fundamental R-6 NA American Funds Growth R-5 NA American Funds Invest Co. R-6 NA American Funds Washington R-6 NA Dodge & Cox Stock NA MFS Value R-5 NA T. Rowe Price Equity Income R NA (Based on data covering January 1, 2011 to December 31, 2015) Disclosure The analyses contained herein are based on past performance and information. While the information has been obtained from third parties believed to be reliable, neither InvestSense nor its owners, officers, directors and employees makes any representations as to its accuracy or assumes any liability for its accuracy, including, but not limited to, any damages resulting from reliance thereon. Past performance is no guarantee of future results. Information about and/or fees and other expenses charged by investment companies and/or on investment products are subject to change.
  12. 12. Copyright ©2016 InvestSense, LLC. All rights reserved. The information provided herein is for informational services only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional service. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services.
  13. 13. Copyright ©2016 InvestSense, LLC. All rights reserved. 2016 XYZ 401(k) Plan Mutual Funds R-Squared Ratings The following mutual funds had an R-squared rating of 90 or above. Therefore, under our scoring system, these funds would qualify as “closet index” funds and raise questions as to the prudence of investing in such funds when similar, or better performance is available through less expensive, true index funds. American Funds AMCAP R-6 American Funds Fundamental R-6 American Funds Growth R-6 American Funds Investment Company R-6 American Funds Washington R-6 Dodge & Cox Stock MFS Value R-5 T. Rowe Price Equity Income R Vanguard PRIMECAP Admiral Vanguard Windsor II Admiral (Based on data covering January 1, 2011 to December 31, 2015) Disclosure The analyses contained herein are based on past performance and information. While the information has been obtained from third parties believed to be reliable, neither InvestSense nor its owners, officers, directors and employees makes any representations as to its accuracy or assumes any liability for its accuracy, including, but not limited to, any damages resulting from reliance thereon. Past performance is no guarantee of future results. Information about and/or fees and other expenses charged by investment companies and/or on investment products are subject to change. The information provided herein is for informational services only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional services. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services.
  14. 14. Copyright ©2016 InvestSense, LLC. All rights reserved. 2016 ERISA Fiduciary Prudence Correlation Matrix (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (1) Dodge & Cox Stock 1 0.97 0.92 0.85 0.96 0.85 0.85 0.96 0.88 0.9 0.86 0.94 0.95 0.93 0.94 0.93 0.95 (2) Vanguard Windsor II Admiral 0.97 1 0.93 0.84 0.98 0.84 0.85 0.98 0.88 0.9 0.85 0.93 0.97 0.92 0.94 0.96 0.98 (3) Vanguard PRIMECAP Admiral 0.92 0.93 1 0.92 0.9 0.92 0.88 0.92 0.93 0.95 0.92 0.88 0.94 0.96 0.95 0.92 0.94 (4) T Rowe Price Blue Chip Growth R 0.85 0.84 0.92 1 0.81 0.99 0.89 0.86 0.97 0.97 0.95 0.82 0.91 0.97 0.93 0.87 0.86 (5)T Rowe Price Equity Income R 0.96 0.98 0.9 0.81 1 0.81 0.84 0.97 0.84 0.87 0.82 0.93 0.96 0.91 0.93 0.95 0.97 (6) T Rowe Price Growth Stock R 0.85 0.84 0.92 0.99 0.81 1 0.9 0.85 0.97 0.96 0.96 0.83 0.9 0.97 0.93 0.87 0.85 (7) T Rowe Price MidCap Growth R 0.85 0.85 0.88 0.89 0.84 0.9 1 0.86 0.94 0.91 0.95 0.9 0.86 0.93 0.93 0.82 0.84 (8) MFS Value Fund R5 0.96 0.98 0.92 0.86 0.97 0.85 0.86 1 0.88 0.91 0.85 0.93 0.96 0.92 0.93 0.95 0.98 (9) Fidelity Blue Chip Growth K 0.88 0.88 0.93 0.97 0.84 0.97 0.94 0.88 1 0.97 0.98 0.86 0.91 0.97 0.96 0.87 0.87 (10) Fidelity Contrafund K 0.9 0.9 0.95 0.97 0.87 0.96 0.91 0.91 0.97 1 0.95 0.89 0.94 0.97 0.95 0.91 0.91 (11) Fidelity Growth Company K 0.86 0.85 0.92 0.95 0.82 0.96 0.95 0.85 0.98 0.95 1 0.86 0.89 0.97 0.95 0.85 0.85 (12) Fidelity Low-Priced Stock K 0.94 0.93 0.88 0.82 0.93 0.83 0.9 0.93 0.86 0.89 0.86 1 0.91 0.91 0.93 0.9 0.91 (13) AmFunds Fundamental R-6 0.95 0.97 0.94 0.91 0.96 0.9 0.86 0.96 0.91 0.94 0.89 0.91 1 0.96 0.95 0.97 0.98 (14) AmFunds Growth America R-6 0.93 0.92 0.96 0.97 0.91 0.97 0.93 0.92 0.97 0.97 0.97 0.91 0.96 1 0.98 0.93 0.93 (15) AmFunds AMCAP Fund R-6 0.94 0.94 0.95 0.93 0.93 0.93 0.93 0.93 0.96 0.95 0.95 0.93 0.95 0.98 1 0.94 0.93 (16) AmFunds Investment Co R-6 0.93 0.96 0.92 0.87 0.95 0.87 0.82 0.95 0.87 0.91 0.85 0.9 0.97 0.93 0.94 1 0.97 (17) AmFunds Wash’ton R-6 0.95 0.98 0.94 0.86 0.97 0.85 0.84 0.98 0.87 0.91 0.85 0.91 0.98 0.93 0.93 0.97 1 Disclosure The analyses contained herein are based on past performance and information. While the information has been obtained from third parties believed to be reliable, neither InvestSense nor its owners, officers, directors and employees makes any representations as to its accuracy or assumes any liability for its accuracy, including, but not limited to, any damages resulting from reliance thereon. Past performance is no guarantee of future results. Information about and/or fees and other expenses charged by investment companies and/or on investment products are subject to change.
  15. 15. Copyright ©2016 InvestSense, LLC. All rights reserved. The information provided herein is for informational services only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional service. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services
  16. 16. Copyright ©2016 InvestSense, LLC. All rights reserved. 2016 XYZ 401(k) Plan Mutual Funds InvestSense Stress Test Stress Fund Score Vanguard PRIMECAP Admiral -1.16 T. Rowe Price Blue Chip Growth R -2.86 Fidelity Growth Company K -3.91 Fidelity Blue Chip Growth K -4.80 Vanguard Windsor II Admiral -4.90 T. Rowe Price Growth Stock R -5.08 (Based on data covering January 1, 2011 to December 31, 2015) Disclosure The analyses contained herein are based on past performance and information. While the information has been obtained from third parties believed to be reliable, neither InvestSense nor its owners, officers, directors and employees makes any representations as to its accuracy or assumes any liability for its accuracy, including, but not limited to, any damages resulting from reliance thereon. Past performance is no guarantee of future results. Information about and/or fees and other expenses charged by investment companies and/or on investment products are subject to change. The information provided herein is for informational services only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional service. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services.
  17. 17. Copyright ©2016 InvestSense, LLC. All rights reserved. 2016 XYZ 401(k) Plan Mutual Funds Fiduciary Prudence Rating Fiduciary Fund Score Fidelity Growth Company K 1.75 Fidelity Blue Chip Growth K 2.22 T. Rowe Price Growth Stock R 2.57 T. Rowe Price Blue Chip Growth R 2.73 Vanguard PRIMECAP Admiral 0.71 Vanguard Windsor II Admiral 0.66 (Based on data covering January 1, 2011 to December 31, 2015) Disclosure The analyses contained herein are based on past performance and information. While the information has been obtained from third parties believed to be reliable, neither InvestSense nor its owners, officers, directors and employees makes any representations as to its accuracy or assumes any liability for its accuracy, including, but not limited to, any damages resulting from reliance thereon. Past performance is no guarantee of future results. Information about and/or fees and other expenses charged by investment companies and/or on investment products are subject to change. The information provided herein is for informational services only and is neither intended to be, nor is to be considered, the provision of investment advisory, fiduciary, legal, accounting or other professional service. Since the proper provision of such services is dependent on the individual circumstances of an individual or entity, the appropriate professional should be consulted for the provision of such services.

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