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Seven Fiduciary Traps to Avoid: #5 Fund Line Up Creep

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In reviewing the fiduciary traps for Plan Administrators and others with fiduciary responsibilities, one pitfall that should be on the list includes avoiding “fund line-up creep.”  

This type of slow steady intrusion can occur when the funds that comprise the portfolio holdings grow increasingly less diverse.  Fading the line of distinctions between them. This is dangerous because the more similar the funds are, the greater is the risk of vulnerability.

Instead, one of the most effective ways to circumvent this trap and reduce risk, is to promote Plan diversity.  

A balanced Plan would include stocks and bonds; and within mutual funds there would be a mix of growth, equity, local or United States and international options.  No one has a crystal ball that enables a view into the future.  However, a diversified portfolio is one of the best recommendations to help the Plan maintain and grow its value.  While nothing can guarantee eliminating all risk, a well thought out Plan that avoids ‘fund creep’ can help minimize the chances of failure.

This approach can contribute to helping the Plan achieve the long range financial goals of the participants. By adopting a diversification strategy, the Plan Administrators can avoid the concept of border line creep where the edges blur and the portfolio holdings begin to have too many similarities to each other (perhaps because they are in the same industry, represent the same type of investment strategy or they share the same basic amount of risk).   

For those looking to avoid this trap, the “D” (Diversity) word is the best practice to follow.