Committees and plan sponsors alike have discussed ways to improve their investment menus over the last several years as a way to help drive successful retirement outcomes for employees. Regulatory changes, market instability and large numbers of investment options have led plan sponsors to devote more attention to their plans investment menus. What steps can committees take to help the problem that has plagued so many participants over the years?
First committees need to focus on the fundamentals of asset allocation, diversification, and expenses. These are proven strategies for long-term risk management and should be the foundation of an effective investment menu. Although diversification can help, it neither assures profit nor guarantees against loss in a declining market. Finding the right number of investments to offer is a fundamental first-step for most committees. This step leads to the discussion of what the best qualified default investment alternative for plans should be.
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Committees need to offer professionally managed solutions, such as qualified default investment alternatives or managed accounts. With the increased use of auto enrollment, these investments continue to attract large contributions. Committees need to understand group demographics to find the right solution. Target-date investments, traditional balanced investments and managed accounts are the qualified default investment alternatives for many plans. These investments help participants construct well-diversified portfolios with little or any time or thought process.
Next, committees need to then put together a core set of investments whether they are indexed or actively managed. Having a good core menu that covers the basic asset classes can empower participants that want to invest outside of the qualified default alternative. Committees need to give thought on the number of plan investments offered as more choices available can lead to participants being overwhelmed.
All about the presentation
Once the menu is decided on, it is all about the presentation to the participants. One way to make the lineup more participant-friendly is to prevent choice overload. Think of walking down the cereal box aisle in the grocery store: With so many choices, how do you choose the one you want? Do you just bypass altogether? While I have seen the average number of options offered to employees rise in the last 20 years, participants continue to invest in only a few options. Offering more choices wont likely result in better decision-making or asset allocations by participants. It usually ends in confusion for employees as they struggle to determine where to invest. Presentation and layout for employee materials can enhance the participant experience as well. Like a cafeteria, if all the desserts are at the start of the line, you fill up on desserts and not the fruits and vegetables you should eat.
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The last and most important point is to pursue active, continuous oversight. Due diligence includes setting clear objectives for the plans investment menu and documenting the investment choice selection and evaluation criteria. Overall, of course, there should be a detailed investment policy statement, which is reviewed on a regular basis. Committees need to have regular meetings to review the information and document what was discussed and what steps the committee is taking.
By implementing the aforementioned steps, committees could better position their plans and participants on the road toward success.
Ludwig, ChFC, AIF, CRPS, is an LPL Financial advisor with LHD Retirement. He can be reached at jludwig@lhdretirement.com.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
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