Plan sponsors often determine their DC plan’s investment structure around what the industry is offering, rather than what is best suited to their own plan objectives and members. It’s time for sponsors to step back and consider the structure that makes the most sense in their particular circumstances—and for the industry to respond accordingly.
For the most part, even with plan sponsors’ efforts to reduce plan member confusion around investment decision-making (including offering target risk and target date funds), DC plan member knowledge and engagement remain low.
In order to better align investment structure with plan design and member knowledge and engagement, plan sponsors first need to revisit the purpose of the plan. Is it the primary retirement vehicle that the employer is offering, or does it provide supplementary retirement income? For instance, is there also a DB plan, or are additional capital accumulation plans available?
Each plan sponsor will inherently approach the development of an investment structure from a different perspective. The plan sponsor may want to “protect members from themselves,” encourage plan members to be self-sufficient or take a position somewhere between the two. Determining where the plan sponsor lies on this spectrum will help decide the amount of flexibility to include in the investment structure.
There are other plan sponsor considerations that will naturally come into play: an understanding of what competitors are doing, along with an appreciation of any additional due diligence or costs that might arise on a change of investment structure.
While plan sponsor considerations are significant, it is equally or more important to determine the level of plan members’ knowledge and engagement, assessed through surveys and utilization analysis. The plan sponsor may discover that various segments of its plan membership are more knowledgeable and engaged than others and be able to segment the population, offering each group a different lineup of investment options that cater to its particular circumstances.
Plan sponsors are currently able to move from an aggregate investment structure to a segmented approach at the group level. (Providers can accommodate such requests.) Ideally, in the near future, recordkeepers will develop the capability to offer investment structures at the member level so that two employees sitting side by side at the same company will have individualized DC plan options that suit their specific knowledge and engagement levels, with plan communication and education geared accordingly.
Given today’s diverse employee populations, a one-for-all approach to DC plan investments will not meet the needs of plan members. By placing the focus on the plan’s goals and members’ individual requirements, plan sponsors can develop more effective investment structures.
Shawn Cohen is a senior investment consultant with Aon Hewitt.
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