Wondering how to
give your participants
the best chance at a successful retirement?
Remove choices from their retirement plan.
In order for participants to be successful in retirement, it is imperative to remove choices from the retirement plan’s investment lineup. To help plan sponsors achieve this, Strategies Capital Management’s investment financial advisors are primed to work directly with plan sponsors to simplify their plan’s investment lineup.
To further explain our view, let’s break down a retirement plan into two simple activities:
The saving part can be easy. The industry has made great strides in developing payroll automation, online enrollment, automatic escalation of contribution percentages, and employer matching contributions. Even the Federal Government has gotten in the act by allowing catch-up contributions, raising contribution limits and creating Roth provisions.
Investing. What has been done to make this easy? Not much!
401(k) investment menus are anything but simple, and usually have so many different investment options that a participant would need to hire their own investment financial advisor to figure them out. Large Cap funds, Small Cap funds, growth vs. value, fixed income and equity funds, domestic vs. international, index products, passively managed vs. actively managed, with performance compared to benchmarks, and all reported on a fund fact sheet. Simple….right? Hardly. The so-called “Participant Directed Retirement Plan” might be great for the employer, but it doesn’t work so well for the participant.
Participants (like nearly every average investor) are not experienced enough to provide appropriate asset allocation as they often do not understand the importance of proper diversification. Additionally, they ignore the impact of rebalancing and do not rebalance frequently enough, and most get caught up in their emotional behaviors such as attempting to time the market.
It’s been proven time and again: The more involved a participant is with investment decision, the more likely it is that they will experience an investment failure. By removing choice from retirement plans, we can further ensure investment success.
Studies show 93% of investor’s return in the market comes from asset allocation….not by timing the market or chasing returns. Unfortunately, participants don’t have the knowledge or the discipline to manage their own allocations. Between 1985 and 2015, a ‘buy and hold’ strategy would have yielded a participant 8.4%, but missing the best 25 days of market performance during that 30 year period would drop the investor’s return to just over 3.0%.
Mutual fund companies tried to solve this problem while garnering new assets into their funds by creating target date products (TDFs). These were a good start to assist participants in allocating their contribution dollars, but, unfortunately, plan participants haven’t used them effectively. Studies show that participants misunderstand the investment option…often using TDFs in conjunction with other investments from the plan’s menu.
Many of the most popular TDF offerings come from fund families who use only their own proprietary funds in the portfolio. That’s not exactly an ‘unbiased’ selection of managers. Some TDF portfolio managers use their newest products in the portfolio that don’t have a track record, or use underperforming managers that wouldn’t be able to gather assets on their own accord. In short, the most widely available TDFs do not offer “best of breed” money managers.
What can employers do to solve this problem?
Simple. Work with their retirement plan advisor to provide professional investment management for their participants.
This approach eliminates participant choice and replaces it with professional guidance. Whether the plan adopts risk based or date based portfolios, the participant simply answers a question (“What’s your risk tolerance?” or “What’s your birthdate?”) and they are defaulted into an appropriate portfolio; No emotion; No decision making; Employees get to focus on saving, and they leave the investment management to the professionals. Our seasoned investment financial advisors are ready to review and simplify your retirement plan.
This simple solution provides the best of both the defined benefit and defined contribution plans, professional investment management with the portability of a retirement plan.