Benefits June 3, 2014

PSNC 2014: Investment Diversification

June 4, 2014 (PLANSPONSOR.com) – 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.
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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.”

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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.

Products June 3, 2014

New Vanguard Process Simplifies Plan Enrollment

June 3, 2014 (PLANSPONSOR.com) – Vanguard’s new “Enroll Now” process simplifies retirement plan enrollment and potentially increases the savings of participants.
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According to the investment management firm, nearly six in 10 of the employees who joined their company’s 401(k) plan during pilot research on the new online Enroll Now process also chose to automatically increase their savings by a modest amount each year, which could increase retirement savings by 40%, or $100,000, over 20 years.

Enroll Now distills the online plan enrollment process into three critical decisions: how much to save per paycheck; whether to increase that amount annually and by how much; and which investments to choose. Suggested choices for each of those are determined by the employer and are pre-populated onto a simple, interactive form. Employees can then select or modify those choices. They can also bypass Enroll Now altogether and use the traditional enrollment process.

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During the pilot research, Vanguard found:

  • Fifty-nine percent of the employees who used Enroll Now chose to automatically increase their savings annually;
  • A higher average contribution rate of 8.2%, compared with the average contribution rate of 7.5% chosen by Vanguard participants in 2013; and
  • A 30% increase in completion of the online enrollment process.

Vanguard developed Enroll Now based on behavioral finance research showing that choice overload in retirement plans—in this case, the steps required to enroll in the plan, select a contribution rate and choose an investment—can stifle any action at all. The aim is to offer employees pre-selected, easy-to-make choices, making the process less overwhelming.

“With longer life expectancies and decades spent in retirement, it is more important than ever for American workers to save adequately for retirement. By providing participants with simple, pre-set, and one-click decisions, Enroll Now should enable more employees to easily take advantage of their workplace retirement benefit because they’re not overwhelmed by having to determine how much to save and which funds to invest in,” says Rebecca Katz, principal of Participant Strategy and Development at Vanguard, based in Valley Forge, Pennsylvania.

More than 70% of Vanguard participants with access to a smartphone or tablet will be able to use Enroll Now on those devices.

The pilot research for Enroll Now was conducted from August to December 2013 on one large 401(k) plan. The Enroll Now option is now being used by more than 530 plans.

More information about Enroll Now is available here.

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