Here’s a quick recap (see also Building a Great 403(b) Menu Part 1, the Groundwork):
- Demographics -- Consider the age, sophistication level and other relevant characteristics of your employee population when deciding upon suitable asset classes to offer;
- Big picture – Frame your decisions within the broader economic and market context;
- Menu length – Excessive choices can cause confusion, which can lead to sub-optimal decisions, including the decision not to participate. Keep the menu relatively concise;
- Accessibility tools – A great menu is only a starting point. Most plan participants are not investment experts, and have trouble building an individual allocation on their own. Provide them with effective education, and offer risk-based and/or age-based portfolios that they can easily opt into;
- Needs analysis – Every plan and every employee population is unique. Perform a needs analysis to identify ways in which you can improve your plan’s results.
With these structural guidelines in mind, let’s move on to discussing the actual process of populating a great investment menu. As we discussed in Part 1, plan-level decision makers are fiduciaries, so it follows that selecting investments for the menu is a fiduciary function. Fiduciaries are held to a Duty of Loyalty and a Duty of Care. The former dictates that all fiduciary decisions must be solely in the best interests of plan participants and the latter holds them accountable to a prudent expert level of operation. What are the implications? One could argue that the Duty of Loyalty requires fiduciaries to build the best menu they can for participants, not just the best they can do within a limited universe of options offered up by a particular vendor. What does this mean? You can create a great Investment Policy Statement (IPS), and you can define a great prudent investment process, but you won’t be able to build a great 403(b) menu if your provider’s platform doesn’t offer great options from which you can pick. It may be incumbent upon you to negotiate harder with your current provider for the inclusion of additional “outside” fund options, or to consider other platforms.