Why do pension plans choose mutual funds?

Pension plans choose mutual funds primarily for better liquidity and diversification. Mutual funds pool money from multiple investors to purchase a broad portfolio of assets. This structure allows pension plans to access a wider range of investment options than they might if they were investing directly in individual securities.

Liquidity is crucial for pension plans as they need to be able to meet their obligations to participants, such as benefit payments. Mutual funds typically allow for day-to-day trading, providing the necessary flexibility to manage cash flows effectively.

Diversification is another significant advantage. By investing in mutual funds, pension plans can spread their investments across various asset classes, sectors, and geographic regions, which helps mitigate the risk associated with relying on a small number of investments. A well-diversified portfolio can enhance the potential for returns while reducing volatility, aligning with the long-term goals of pension fund management.

In contrast to the other options, while minimizing expenses can be a consideration in investment decisions, it is not the primary reason for choosing mutual funds. Investing exclusively in growth stocks is too narrow a strategy for pension funds, which typically aim for balanced portfolios. Additionally, avoiding checking past performance contradicts prudent investment principles, as evaluating historical performance is a key part of assessing potential investments.