PSNC 2014: Investment Diversification

Amid the discussion of industry best practices at the 2014 PLANSPONSOR National Conference, the question of the retirement plan investment menu and how it has or should evolve came up continuously.

Industry experts and attending sponsors alike questioned whether a lineup of traditional mutual funds should still make up the core retirement plan menu, and whether alternatives should be added. Others asked about the ideal number of funds to include on a plan menu, and whether prepackaged investment solutions make sense for all employees.

According to Tim McCabe, national sales manager and senior vice president of Stadion Money Management, “The pendulum has swung the other direction from just 10 years ago. There has been a huge reduction of the plan menu.”

And as investment menus have shrunk, many more packaged products have hit the market, McCabe adds. Fifty percent of retirement assets are currently in packaged products, he said, and that could grow to 80% going forward.

“The majority of participants should be in a professionally managed solution,” concurred Josh Cohen, managing director of defined contribution for Russell Investments. “It doesn’t matter if they are all PHD’s or factory workers, they should still be using a target-date type product.

“There is no magic number that makes for a more manageable fund menu. It depends on what you want to put in participants hands, although six to eight funds that are different from each other is a good number to start with,” Cohen said.

“For the participant who chases performance, we think adding alternatives in a packaged format that includes, for instance, real assets, income alternatives and alpha alternatives can work well,” said Laura Lawson, senior client portfolio manager in the OppenheimerFunds Global Multi Asset Group. “This is generally what is appropriate for the DC market, but how you put it together is important.”

McCabe said that Stadion Money Management uses exchange-traded funds (ETFs) for a similar purpose.

“For instance, in a 2050 target-date fund, we would use 50% equity and 10% bond, plus a tactical sleeve made up of all ETFs, giving the manager the ability to be opportunist on behalf of the participant,” McCabe said. “We might use gold, timber, commodities, all packaged inside a professionally managed account. This also leaves us 40% of the fund to smooth out returns over market volatility.”

Cohen added that breaking away from name brand fund recognition is a good goal. “In the end a brand name fund doesn’t help a participant. It’s difficult to make a change in funds when participants are attached to a name. It’s better to change to a more generic fund so able to make changes with confidence.”

“The good news about breaking such an attachment is that companies are offering 3(38) fiduciaries to help you make those decisions,” McCabe added.