Menu construction is a good place for plan advisers to start, according to David Ray, managing director, head of institutional retirement plan sales at TIAA-CREF. “A lot of research shows that too many options are too many options,” Ray tells PLANADVISER.
Another finding from the TIAA-CREF Investment Options Survey mirrors other studies: 18% of survey respondents say they have too many investment choices.
Citing research by Sheena Iyengar, a Columbia Business School professor known for her investigations on choice, Ray notes that with every 10 new options offered, enrollment in a plan drops 1-1/2% to 2%. The best approach is to keep the menu simple, he says. While there is no one magic number that works for all plans, Ray suggests the right number is probably in the range of five to 10.
The need to tinker with menu lineups and investment vehicles may mean that it’s more of a challenge to engage participants, but Ray says the numbers of participants who admit to feeling confused mean opportunity for plan advisers.
Several factors operate in today’s defined contribution (DC) landscape, Ray says. First, the changing emphasis from defined benefit (DB) to defined contribution (DC) shifted the risk, but not the best practices, Ray feels. One basic goal of a DB plan is provide income replacement in retirement, but DC plans are not necessarily set up that way.
The focus in DC plans has been mainly on accumulation of assets, but this could be changing. More advisers are starting to ask questions about income replacement in retirement, Ray says.A Retirement Policy Statement
Outcome is gaining attention, and plan advisers should suggest that plan sponsors create a retirement policy statement to help shift the focus to outcomes. It is more common to focus on these intentions with the investment policy statement, Ray says, paying attention to how investments are performing. But the real question should be how the plan is performing.
“It’s not about the best-performing investments,” Ray says. A retirement policy statement would outline the employer’s vision for their retirement plan, such as how to achieve replacement income, and how to educate participants and help them effectively save for retirement.
This is an enormous population to serve, Ray says, citing population projections from the Pew Research Center that say some 10,000 Baby Boomers will retire every day for the next 18 years.
A substantial majority of participants (81%) trust the education they get from plan sponsors, the survey found. Ray calls education a real opportunity for plan sponsors and advisers to engage employees. Effective engagement would be one-on-one advice, since investments are complex, and participants are reluctant to raise their hands in group advice sessions to ask for information.
Other issues to address could be gender and age differences, and how people digest information.
“We have older workers and more females in the workplace,” Ray notes. “Are there ways to address that in a retirement policy statement with education, with seminars, and other methods of education?”
The retirement policy statement could address the importance of face-to-face advice, rather than Web-based advice at the employee’s convenience.
Regardless of what’s on the investment menu or how you do education, utilization has to be a plan’s key driver. The biggest variety of investment offerings counts for little if users can't use the Web-based advice or planning tools, Ray said.
The survey results were not particularly surprising, Ray feels, but plan sponsors and advisers should see it as an opportunity to help employees navigate their investment options.
The survey was conducted by an independent research firm and polled a random sample of more than 1,000 adults nationwide on their retirement plans. A summary of the findings can be downloaded here.