Retirement plan investment line-ups are an increasingly complex and vital decision for fiduciaries. Critical responsibilities include the amount of 401(k) investment choices to offer as well as the types of asset classes in which to invest. Some fiduciaries have been sued for offering too many choices, while others have been sued for offering too few.

The key to mitigating risk is using a prudent, participant-centered process to determine which asset classes benefit the participants in the plan.

Plan design and participant demographic considerations are important components of a decision-making process that can help fiduciaries strike the right balance between a simple menu that minimizes participant confusion and a more robust menu that offers participants adequate diversification.

Increasingly, it’s important to consider each individual participant, as opposed to an overall demographic average. Here are five considerations you don’t want to overlook:

  1. Auto Enrollment: Does the plan automatically enroll or re-enroll participants? This can be a reflection of the amount of control that participants desire. Plans with automatic features default the majority of participants into a target date fund or other multi-asset class option. Participants wanting to make their own asset allocation decisions must affirmatively opt-out of the default options. Requiring the extra opt-out step makes plans with automatic features more effective at ensuring participants who want more control are actively making that decision.
  2. Access to Individualized Education: Many participants are overwhelmed by the complexities of investment decisions. However, educational resources and individualized financial advice can help alleviate confusion and empower participants to take advantage of the diversification benefits provided by specialty asset classes.
  3. Investment Background: A participant’s background from previous professions, studies, and interests can translate into decisions made for their retirement plan. Those with greater investment knowledge may benefit from a more diversified menu of options.
  4. Age Clustering: The spread of ages in a plan’s demographic can influence the variety of options that are most appropriate. For example, as participants approach retirement they are more likely to have specific investment objectives like capital preservation or income generation that require exposure to specialty asset classes. Fiduciaries may want to consider a broader menu with additional investment options if there are a large percentage of plan participants within five to 15 years of expected retirement.
  5. Retiree Behavior: An increasing number of retirees may keep their savings in their former employer’s 401(k) rather than rolling the assets into an IRA. Retirees often have income needs that may be difficult to achieve with traditional asset classes. The employer’s fiduciary responsibilities are the same to both active employees and retired employees who still have account balances. While the circumstance of each retiree is certain to be unique, as a fiduciary, investment options should reflect possible solutions to some of those retiree circumstances.

A fiduciary tip
Incorporate your menu design philosophy into your plan’s Investment Policy Statement. Your specific plan features or participant demographics can be documented in committee meeting minutes.

Like all fiduciary decisions, the best way to manage risk is to follow a documented process that is designed to identify plan participants’ needs and offer investment options which are in participants’ best interest.

The IPS should be reviewed, updated, and modified as appropriate on a periodic basis to reflect changes in the investment environment, option performance, and plan needs.

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