Employers can use targeted internal communication and other tactics to help their employees understand asset allocation and empower them to make better choices, Sibson Consulting maintains.
“Most employees find asset allocation extremely confusing,” says Jonathan Price, vice president with Sibson. “Left to their own devices, they may make less than ideal decisions. This can include adjusting their allocations at the wrong time, chasing returns, not responding to changes in their lives and investing too much in stable value funds or company stock.”
To illustrate the point, Sibson examined a hypothetical 25-year-old employee who defers $5,000 annually to her defined contribution (DC) plan. If she had started investing in a target-date fund (TDF) in 1977 (if TDFs were available then), she would have earned only 3% more than if she had invested in a 50/50 equity/fixed income balanced fund. However, either of these options would have given her better returns (31% to 34% better) than if she had invested all of her assets in a fixed income fund.
“Because asset allocation is so important, Sibson recommends employers consider embarking on a two-pronged process,” says Doron Scharf, senior vice president with Sibson. “First, they should better understand their employees’ financial situations. Then can then apply what they learn to give their employees the data they need to make informed decisions.”
Specifically, Sibson says employers should be looking for allocations that have inappropriate levels of risk, lack diversification and are invested in multiple TDFs. Sibson says it is also important to see if a participant has excessive loans.
Sibson says to mitigate these problems, regular, targeted education about asset allocation and participants’ own goals can be effective. An individual retirement readiness statement is another tool employers can use, as well as one-on-one meetings, broader campaigns and modeling software.