PSNC 2015: Optimizing the Investment Menu

Are investment menu consolidation and simplification in the best interest of plan participants?

Implementing a best practices process for investment selection and ongoing monitoring can mitigate fiduciary liability and will ensure that participants have a better chance of reaching their retirement goals.

Offering fewer investment options on the plan menu is better for participants says Richard A. Davies, senior managing director—defined contribution and co-head of the Institutions North American Client Group at AllianceBernstein at the annual PLANSPONSOR National Conference in Chicago.

“Many people in the industry talk about a three-tiered investment menu,” Davies said. “Instead, we’re in a camp of 10 options—plus a managed account or brokerage window. Streamlined investments work for 95% of participants” Davies says.

If participants have too many options, it becomes very difficult to make a decision, concurs Michael Riak, principal, head of U.S. defined contribution at Pantheon Ventures who previously worked as a plan sponsor for a large corporate plan. “We got rid of retail funds and instead create white-labeled funds,” Riak said. “You can use comingled funds or create a custom target-date suite. We used hedge funds, currency overlays and other alternatives, creating a great engine. I’m a big advocate for reducing the amount of fund options and using the best possible funds.”

Next: Active Versus Passive Funds

When contemplating whether to use active or passive investments, Davies says that in the past it was simply one or the other approach. It was almost a religious debate. “Now there is more intelligent conversation regarding intermingling active and passive, and you see that on the plan menu," he says.

Davies continued: “You leave too much on the table by not going active. But there’s a question of getting the right mix. There were people who went purely passive, post financial crisis. Now the pendulum is swinging back to using global bonds, U.S. small cap funds, emerging markets and adding [other] active management [options] back to their plan menus or custom portfolios. This is a healthy trend."

"I understand the conversation and concern about fees," Riak said, “but we should be looking at net returns. There is a retirement crisis. Defined benefit plans are going away. New people coming into companies are not being offered pensions. DC plans are the most important way for people to save for retirement. Help participants by using alternatives in good times and protect them by using alternatives in down times. Use the funds that DB plans have used successfully outperforming DC plans significantly for years."

Next: The Right Allocation

Toni Brown, senior DC specialist at American Funds agrees with Riak that "putting extra effort into finding the right allocations can make a huge difference on outcomes for participants. Unfortunately, she says, many people in the industry do what is easy and safe. When you look at the possible aggregation results for participants over time of even a few basis points, it’s worth the time and energy."

Brown said that “by giving guidance to plan sponsors, the Pension Protection Act (PPA) did three great things to refine asset allocations on the investment menu and to better serve participants—auto enrollment, auto escalations and defining the QDIA. Importantly, these are all asset allocations of some form since they take the decisions away from participants. Plan sponsors have adopted them, and participants have embraced these tools. Once the money is in the plan, participants can get a good return.