Take the lead in evaluating the investment options in your retirement plans
In last quarter’s post we discussed the first three actions you should visit with your plans this year. For second quarter, I’ll share three more actions you can take, focused on “upgrading the investment menu.”
Applying sound institutional thinking, with industry insights like these will ultimately benefit plan sponsors and participants, leading them closer to the goal of retirement security. View a summary of the 11 actions for 2011.
Upgrading your investment options
Demystify the “Date Debate”
Target date strategies differ in terms of equity allocations at the point of retirement and beyond. This “Date Debate” is often labeled “To vs. Through”, but this doesn’t help you determine which target date strategies will help your participants meet their objectives. The charts below illustrate the confusion around what a “to” and a “through” glidepath means:
Getting the target date decision right, particularly if it’s the plan’s default investment option, is crucial. After choosing target date strategies, periodically review your choice. Investment volatility, market innovation, new research, and scrutiny from Washington D.C. may dictate changes. Access our research paper on the Date Debate.
Consider adding alternative asset classes to Target Date StrategiesAdding uncorrelated asset classes, such as commodities, to a target date fund may make sense for diversification purposes. Look beyond recent performance – take a long-term, thoughtful approach to create the optimal mix of underlying asset classes. Institutional investors believe alternative asset classes can add value and help reduce overall portfolio risk over the long-term, so consider offering them to your participants.1
Choose Best of Breed Managers
Is your investment menu limited to proprietary funds from a single provider? Fiduciary best practices and the current regulatory environment caution against that.2 No investment manager is best in class in every asset class. Specialists typically outperform generalists. Consider the illustration below from the 2008 Beijing Olympics – when we compare the performance of the gold medal-winning decathlon champion with the individual event champions, the individual specialists win every time. Offer investment options because they provide the best available strategy for your participants in that asset class. If they don’t, look to make a change.
Take the lead in evaluating these options and you may find an opportunity to improve, aiming towards more successful retirement outcomes for participants.
Next quarter, we’ll look under the hood at stable value funds and fees…
Commodities are volatile investments on their own and should form only a small portion of a diversified portfolio to aid in diversification and as a potential hedge against inflation.
1 “11 for 2011: 11 actions designed to improve your Defined Contribution Plans in 2011” by Josh Cohen and Ben Jones, published January 2011.
Tags: DC plans