A new study from Invesco finds that defined contribution plan providers often overlook participants who actively make investment decisions across the plan menu in an effort to diversify and hone their risk profile.
This comes at a time when DC plan decision makers have made significant progress in helping participants reach a financially secure retirement through auto-enrollment, auto-escalation and automatic default into target date funds.
“Qualified default investment alternatives, through the increased adoption of ‘autos’ and TDFs, have steadily evolved with the Pension Protection Act, but core menu design has remained relatively unchanged leaving behind a subset of participants who do not believe investing solely in a single TDF is right for them,” said John Galateria, Invesco’s head of North America institutional, said in a statement.
Galateria said that although TDFs are a good default option and an appropriate choice for many participants, particularly those who prefer not to actively manage their retirement investments, the industry can evolve the current DC investment menu to address the needs of these “forgotten participants.”
“Despite their best intentions, we also found some participants making financial decisions in their retirement plan with admittingly limited financial knowledge, which could be of significant fiduciary concern for plan sponsors,” he said.
“The addition of risk-based strategies can help strengthen a plan sponsor’s fiduciary standing, and also provide a guard rail for participants who lack the time and knowledge to create a diversified portfolio from core menu options and rebalance regularly.”
Invesco and Greenwald & Associates connected with 110 plan sponsors at organizations with at least 5,000 employees and DC plan assets of $250 million of more. The study also included an online survey of 2,001 DC plan participants. Participants were 21 to 72, had a personal income of at least $30,000 and were currently contributing to a DC plan through full-time employment at an organization with at least 5,000 employees.
The Invesco study showed that participants who want more control in building their own portfolios and do not consider investing in a single TDF as right for them intentionally allocate across TDFs and the core menu in an effort to diversify and fine-tune their risk level.
The study noted that these participants approach decision making with limited investment knowledge and often with overconfidence, which can lead to poorly constructed portfolios that may not be systematically rebalanced, properly diversified or in line with how much or little risk a participant is willing to take.
In an asset allocation exercise among focus group participants, only 6% said they invested in a single TDF.