Plan fiduciaries and retirement plan committees would do well to consider the trends in the ways that retirement plan funds are invested and the behaviors and attitudes of plan participants, recommends a recent analysis.
In “Emerging Trends in 401(k) and 403(b) Fund Menus,” a post on Greenspring Advisors’ blog, Joshua Itzoe argues that “Given the shift in participant mindset and demographics, it’s important for retirement plan committees to re-think the traditional approach to designing plan investment menus.”
Itzoe notes that it had been common practice for plans to give participants a wide range of choices regarding how their retirement plan funds are to be invested and to trust that participants will make good choices. But he also notes that another concept begs to differ — choice overload, which holds that giving too many choices “leads to increased complexity and has been associated with unhappiness, decision fatigue and choice deferral,” leading most people to “make worse decisions, not better ones.” Itzoe also cites a 2010 paper in which the researchers, Sheena S. Iyengar and Emir Kamenica, write that they found that giving participants too many choices can hurt plan participation.
As retirement plan committees grapple with how to respond to the requirements set by ERISA’s “high standard of care,” as well as “the growing body of behavioral research that shows participants generally make decisions that lead to sub-optimal outcomes,” Itzoe writes that “it’s important to simply recognize that plan decision-makers’ exercise enormous influence on both the choices their participants will make and the outcomes they experience.”
Itzoe argues that the “target outcome” should be a “simplified user experience, minimal flexibility and a high probability of improved decision-making.” He suggests that committees may find it useful to pursue a tiered approach that offers a wide variety of options, ranging from those that incorporate a QDIA/default option and low-cost target date funds (TDFs) to core asset class funds, style-based and/or alternative asset class funds, risk-based model portfolios, managed account services and brokerage windows.
“I believe it’s safe to say that the starting point and single most important investment decision for this generation of retirement plan fiduciaries revolve around the target date decision,” writes Itzoe.
Itzoe reminds that even retirement plan committee decisions seem small “can have an enormous impact on outcomes, especially over long periods of time like a working career.” He argues that committees are responsible for “wisely using the latest available information, research, and techniques to design an investment lineup that ensures a high probability of success for plan participants and beneficiaries.”