The intent of this series is to provide a brief reality check and ideas for improvement where warranted. Let’s begin with the groundwork upon which a great menu is built, including:
- The role of demographics in determining asset classes to offer;
- The importance of framing menu decisions within the bigger economic picture;
- Size matters; too few or too many menu options can hurt results;
- Accessibility tools; translating a great menu into great individual allocations;
- “Needs analysis” can make the difference between motion and action; and
- The importance of establishing and following a prudent process.
You will see that common sense and the right advice will get you where you need to be.
BTW, you may have skin in the game. Are you a plan-level decision maker? This includes having a vote on your plan’s committee. If so, you are probably a fiduciary. That’s not necessarily a bad thing. Plans couldn’t function without fiduciaries, and while fiduciaries are held to an expert standard, it is completely proper to rely upon outside expert advice.
Are you getting advice? If a vendor receives payment for giving advice, that makes it a fiduciary. But many vendors and brokers have policies against accepting fiduciary responsibility. Therefore, what appears to be their “advice” and “recommendations” are not actually advice and recommendations; they are “information” that you can use as you wish. That may be fine, but be careful about believing that they are covering your back. If in doubt, ask them if they accept fiduciary responsibility, and if so, ask them to detail it in writing. If not, consider hiring an independent investment adviser to sit on your side of the table.
Begin at the beginning. Surprise, it’s an important fiduciary obligation to tailor your plan’s investment menu to the demographics of your eligible participant population. An off-the-rack vendor menu may not fit. If your plan has been in place for years, take a fresh look today at the composition of your participant population. Has the average age gone up? [If not, what are you putting in the water cooler?] What about your participants’ education levels, computer literacy, degree of investment sophistication, language barriers, etc.? Tailor your menu to meet their needs. And remember, anyone with a balance in your plan is a participant and should be considered, even if they terminated or retired. It’s common sense that an unsophisticated population might do better with plain vanilla funds and easy allocation tools, whereas an investment savvy population could justify some more exotic options. Other demographic considerations might take more thought. For example, a participant population with many individuals approaching or beyond retirement age might justify a discussion about inclusion of more fixed income options. That’s a reasonable line of thought, but be careful how you execute!