2. Don't "box" yourself in. When simplifying core menus, Coelho suggests moving away from the traditional style boxes and considering broader core style mandates such as passive and active to achieve greater diversification across the risk spectrum. "Many plans are overweight U.S. equities and although these investments can represent different styles, they may be highly correlated to one another and can offer a poor level of diversification," he explains.
3. Find "skillful" multi-managers. Single managers can quickly go out of favor or leave organizations. That's why many sponsors prefer a multi-manager structure, which can offer exposure to a range of styles and offer greater diversification for participants. Elvander recommends looking beyond performance to find "skillful" managers in both asset allocation and security selection.
"It's pretty easy to identify the hottest or the best performing manager when you've got one metric--performance. But it's important to look at both qualitative and quantitative aspects such as philosophies, styles, and approaches," he explains.
Elvander adds that many plan sponsors make the mistake of grouping all managers of different investment styles together in one category—such as active and passive—and then evaluating them according to their peer group ranking or whether they are in the top decile. "That's like looking at returns only," he says. "If managers have different philosophies, it means you need to look at them differently."
He also believes it's important to establish a broadly-defined benchmark, while allowing managers to demonstrate their skill in areas that may not be their core strategy, but in areas where they can add value where appropriate, such as global real estate, emerging markets, or Treasury Inflation-Protected Securities. These types of investments can be grouped together and provide broader diversification without "crowding" the menus.
4. Customize, when appropriate. Target date funds are becoming a predominant element of DC plans. But just as core menus are evolving to include a multi-manager approach, Coelho believes more plans will migrate from a single provider to a custom, multi-manager approach to address the needs of a more diverse demographic.
His team recently worked with an insurance provider to not only implement auto features and a reenrollment, but also to create a custom target date solution. Initially, the plan sponsor was concerned about having participants default into a custom solution—but participants responded enthusiastically.
"They appreciated the thought that went behind the design—they even thanked us after the participant meeting," says Coelho. "They saw the value in having a best-in-class offering utilizing best-in-class managers. As a result, both plan participation and satisfaction has increased. From the plan sponsor's view, they are happy they don't have to avoid the investment discussion—like they did in the past—and have now become more engaged about the well-being of their participants."
Coelho adds that custom target date options are just one of many options and features plan sponsors should consider when evaluating menus. "Ultimately, to really move the needle and improve menu design and outcomes, we need to consider everything—reenrollment, auto features, streamlined menu design, custom target date funds, and more," he says. "All of these features and options are important parts of the stew. There is no one silver bullet."