How do you find the right balance – both number and type – of retirement plan investment options for a diverse base of employees? Creating an effective retirement plan investment menu to meet the unique needs, knowledge and engagement of an employee base does not have to be difficult. One proven way to simplify the task is to use a tiered investment line-up to help participants navigate the investment path that best fits their individual needs.
By allowing the end participant to determine their level of involvement in the investment selection process, they are more likely to achieve a better retirement savings outcome. To better understand this tiered approach, we turn to a familiar analogy — dinner options. Think of the three tiers as ordering delivery (“do-it-for-me” investors), selecting a prepackaged meal (“do-it-with-me”), or cooking your dinner from scratch (“do-it-myself”) — it’s up to the participant’s retirement appetite. Illustrated below are suggested investment options for each of the three tiers and how to structure a line-up for choice and simplicity.
It is the easiest approach – similar to a hot pizza delivery. Simply select from the menu and receive your order with no food preparation necessary. The “do-it-for-me” investor would likely choose a target date fund, with expected retirement date as the only factor in the decision-making process. The auto-adjusting glide path will do the rest.
Just like the pre-portioned meal delivery services that have taken off in recent years, investing in this tier requires minimal prep work. Select meals based on your dietary preferences and the proper ingredients, in just the right amounts, are delivered with instructions for you to prepare. The “do-it-with-me” investor may select a target risk fund or model, after determining his/her own risk tolerance level.
According to the data from the Plan Sponsor Council of America’s 2016 survey report, 89% of plans are missing a Target Risk Suite. We believe the “do-it-with-me” investor is being under-served.
While complicated and time consuming, making your own dinner from scratch gives you total control of the menu – from recipe, ingredient selection, measurement and preparation. The “do-it-myself” investor will manage their retirement investment allocation by choosing funds from the core menu.
Understanding that each approach is valid, the key to a successful tiered investment line-up is helping participants identify the best option and provide any necessary education to guide their decisions.
We have been collecting and analyzing data from several industry surveys for a number of years and one documented trend that we see is the decline of target-risk funds, which as we mentioned above, play a significant role in a tiered line-up. According to the Plan Sponsor Council of America 2016 survey report, 89% of plans were missing a Target Risk suite as an investment option in 2015.
Target-date funds – which serve the “do-it-for-me” investor – remain the popular choice for plan sponsors and participants, especially as it relates to the default investment within plans. By incorporating a target-risk fund suite, you’re allowing those “do-it-with-me” investors to take a little more control of how they align their risk tolerance with investment choice. You’re also providing a satisfying option for the plan sponsor in establishing a well-nourished investment line-up.
So, next time you are discussing investments with your plan sponsor clients, think of the dinner analogy and ask yourself if the three investor types are being properly served.
To see other trends and industry benchmarks related to investment choices and retirement plan design, download 2017 DC Conversations: an industry assessment. The full report is available in PDF and PowerPoint formats and can be used to help lead a better conversation the next time you meet with your plan sponsor clients.
To download 2017 DC Conversations: an industry assessment, visit http://bmogamviewpoints.com/2017-dc-conversations.
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