Today’s ever-changing investing landscape requires a more flexible approach to core investment menu design. Here, we outline a few simple approaches to consider that are working for some leading DC advisors:
- Focus on quality, not quantity in your core menu -- make investment selection as easy as possible for participants.
- When selecting a target date fund, look under the hood to understand how the fund is designed and whether that design is appropriate for changing participant needs.
- Embrace a more flexible approach that moves beyond traditional options and includes a mix of both active and passive investments to help reduce costs and manage risk.
The investing landscape has gone through upheaval since the financial crisis, with the onset of routine volatility and prolonged low interest rates. As a result, retirement savers ranging from the most unsophisticated to the extremely knowledgeable have started looking for ways to better manage risk while still achieving a reasonable return.
So, how is this shift in priorities among investors impacting the core investment menu design of defined contribution plans?
DC Edge sat down with three retirement plan advisors who are considered innovators to learn about their approach to designing core menus in this new climate: Edward Lynch Jr., Managing Director and Chief Retirement Officer of Dietz & Lynch Capital; Matt Gnabasik, Managing Director of Blue Prairie Group; and Patrick Morrell, Vice President of Business Development and Investments at Ingham Retirement Group. They shared their experiences helping clients make the transition from older plans to more flexible, user-friendly ones designed to better meet participant needs, cut costs and adapt more quickly to changing times.
Setting the foundation—consider quality, not quantity
The biggest issue plan participants face: Too many choices. To meet the needs of investors with varying levels of investment expertise and interest, many plan sponsors offer a dizzying array of investment options in their plans. But is a bigger menu better? Given too many choices, participants can quickly become overwhelmed. How much is too much, and at what point does so-called “analysis paralysis” set in?
Our three advisors agree that plan sponsors should consider offering a diverse set of high quality, cost-effective investments across a range of asset classes — including domestic and international equity, fixed income, cash and cash equivalents — to help provide flexibility and choice for participants. But plan menus should also make fund-picking as easy as possible for participants who may not have the time, knowledge or interest to make appropriate investment decisions.
That means plans need to be designed with “the least sophisticated participant” in mind, says Edward Lynch Jr. of Dietz & Lynch. “When we think about constructing a menu, what we really think about is how we keep people from doing damage to themselves.”
Lynch encourages plan sponsors to consider using menu design to add a “qualified default investment alternative,” or QDIA, in effect making an appropriate investment decision on behalf of those participants. Once you have a QDIA in place, “You’re about 80% to 90% of the way toward a well-designed plan,” he says.