401(k) Core line-ups: A diamond in the rough

401(k) Core line-ups

My wife and I recently celebrated our sixteenth wedding anniversary. As I considered gifts, I thought about a gift that started our adventure—a diamond ring. When I bought her engagement ring, I knew very little about diamonds. I knew I didn’t want to walk into the jeweler and say to the sales clerk, “Here is how much money I have, just pick one.” By the same token, I knew I didn’t want the sales person to line up a row of diamonds and just let me pick. I needed some coaching. I needed someone to help me use my limited financial resources to select the perfect diamond for what I planned to be a lifelong investment. The sales person helpfully instructed me in the four C’s of diamond buying: Carat, Cut, Clarity, and Color (some have added a fifth “C”—Cost) and provided a smaller sample of diamonds from which to select. Picking a diamond was still overwhelming for me, but with the salesperson’s coaching, I built up my confidence to pick the perfect diamond from the smaller selection the jeweler showed me.

Some participants in a 401k plan can have a similar experience. They don’t want to be like the do it for me investor and say, “here’s my money, just put it in the default.” And, they feel little desire to be a do it myself investor asking for a brokerage window to pick all their own investments. They want to make their own decisions on their investments, but the process and investment menus can still be overwhelming. Similar to when I bought the engagement ring, these do it with me investors would benefit from assistance and a smaller menuA streamlined menu combined with some embedded advice helps provide these investors with the confidence they want in their investment selections.

Similar to the four C’s of diamond buying, I have come up with 3 M’s to help advisors embed advice into a core investment menu for do it with me investors. The three M’s are Multi Asset, Multi-Manager, and Managed Accounts.

  1. Multi-asset: Consider adding target risk funds in addition to target date funds. Many investors know whether their risk tolerance makes them an aggressive, moderate, or conservative investor, but due to limited time, desire, or knowledge they may not want to put the investment allocation together themselves. Adding target risk funds, in addition to target date funds, helps those “do it with me” investors to have a diversified, multi-asset portfolio, but still maintain more control over the allocation than a target date fund may provide. (Contact a Russell DC Specialist, at DCDirections@https://russellinvestments.com, for more information on a sample investment policy statement designed around participant behavior and using target risk and target date funds in the same line-up.)
  2. Multi-manager: Use broadly diversified, multi-manager funds whose name describes their purpose rather than using only brand names with narrow investment objectives. For example, a fund named ABC “Invincible” Fund tells the do it with me investor significantly less than a fund named ABC US Large Cap Equity Fund. Additionally, multi-manager funds can give investors access to diversification beyond traditional methods. A core menu may not typically include access to funds investing in emerging markets, international small company stocks, or frontier markets. To help give access to these types of investment opportunities, a multi-strategy, multi-manager fund may include additional strategies and asset classes not traditionally offered in a 401(k) investment line-up.
  3. Managed Accounts: Consider adding a managed account option to allow do it with me investors to incorporate their outside assets into a customized allocation. As a do it with me investor uses the managed account services, they may be able create more optimal portfolios for their unique circumstances.

An investment, like a diamond, can be a complex and intimidating purchase. Without the proper guidance, both purchases can lead to buyer’s remorse. An effectively designed core line-up, however, can offer participants a lifelong investing partner.

Chris Barlow is a Retirement Plan Specialist for Russell’s private client services business.

Diversification, strategic asset allocation and multi-asset investing do not assure profit or protect against loss in declining markets.

The multi-manager approach may result in a fund holding a concentration of certain types of securities, which may be beneficial or detrimental to performance. It may also increase portfolio turnover rates, which may result in higher transaction costs and realized capital gains or losses.

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