Reduce the number of investment options.
This is possibly the best way to improve the performance and participation in your plan. Many plan sponsors and their service providers believe that if they include a large amount of investment options in their plan, employees save more. They also are mistaken in believing that they reduce their fiduciary risk by including a large amount of fund options. This is far from the truth. The truth is that the more options available the more confused the participant becomes. This confusion results in paralysis and nothing is done. Even worse the participant looks at all the options choosing the best performing funds over the short term. This lack of diversification will hurt performance and the ability of participants to successfully retire.
A better approach would be to offer risk adjusted globally diversified model portfolios. Your plan would then resemble a pension fund like plan. This takes the investment choices and allocation out of the participant hands and into the hands of an investment professional. Most plan participants either never review their portfolio mix or rebalance to the proper allocation or they will over trade. Neither path will result in favorable outcomes. In fact over trading is the most detrimental to a portfolio. There is an old saying ‘your portfolio is like a bar of soap the more you touch it the smaller it gets’.
Ideally plan sponsors should consider hiring an ERISA 3(38) Investment Manager. This arrangement must be in writing. It will transfer the responsibility and fiduciary risk for investment choices to the ERISA 3(38).
The investment manager will build the model portfolios and be accountable for the proper investment. The implementation of the plan would involve automatically investing in a model portfolio based on the employee’s age. Once this is complete the employee has three options:
I. Remain in the assigned portfolio
II. Complete a risk assessment to determine the proper portfolio
III. Opt out of the model portfolios and choose their own fund mix
Studies have revealed that most participants will remain in the assigned portfolio and will save more with less anxiety.
- Personal Capital: Investment Portfolio Management Tool + $10 Bonus (mymoneyblog.com)
- A Wake-Up Call & Fee Disclosures for 401(k) Plans (ritholtz.com)
- 8 Points to Consider Before Rolling Over a 401(k) to an IRA (401kplanadvisors.com)