The first culprit could be menu construction, according to David Ray, managing director, head of institutional retirement plan sales at TIAA-CREF. “A lot of research shows that too many options are too many options,” Ray tells PLANSPONSOR.
A finding from the TIAA-CREF Investment Options Survey: 36% say they have either too many or too few investment choices. The survey results were not particularly surprising, Ray feels, but plan sponsors and advisers should see it as an opportunity to help employees navigate their investment options.
Citing research by Sheena Iyengar, a Columbia Business School professor known for her research about choice, Ray notes that with every 10 new options offered, enrollment in a plan drops 1.5% to 2%. The best approach is to keep the menu simple. While there is no one magic number that works for all plans, Ray says a number in the range of five to 10 is probably right.
So many benefits have shifted to a self-service model for employees; they educate themselves and make their choice. But many struggle with retirement choices, Ray says, because the concepts can be difficult to grasp.
Only a very small percentage of participants are experienced investors, Ray says, but plan sponsors expect them to make investment decisions the same way as an investment committee. This is unrealistic. “Those employees need help, and advice is the best way to give it to them,” he says.
A substantial majority of participants (81%) trust the education they get from plan sponsors, the survey found, which Ray calls a real opportunity for plan sponsors to engage employees. Effective engagement would be one-on-one advice, since investments are complex, and participants are reluctant to raise their hands in group advice sessions to ask for information.
The shift from mostly defined benefit (DB) plans to defined contribution (DC) plans shifted the risk, but not the best practices, Ray feels. One basic goal of a DB plan is provide income replacement in retirement, but DC plans are not necessarily set up that way. The focus in DC plans has been mainly on accumulation of assets, but this could be changing.
Outcome is gaining attention, and plan sponsors should consider creating a retirement policy statement to help shift the focus to outcomes. It is more common to focus on these intentions with the investment policy statement, Ray says, paying attention to how investments are performing. But the real question should be how the plan is performing.
“It’s not about the best-performing investments,” Ray says. Such a statement would outline the employer’s vision for their retirement plan, such as how replacement income can be achieved. Other issues to address could be gender and age differences, and how people digest information.
“We have older workers and more females in the workplace,” Ray notes. “Are there ways to address that in a retirement policy statement with education, with seminars, and other methods of education?”
The retirement policy statement could address the importance of face-to-face advice, rather than Web-based advice at the employee’s convenience.
Regardless of what’s on the investment menu or how you do education, utilization has to be a plan’s key driver. The biggest variety of investment offerings counts for little if users can't use the Web-based advice or planning tools, Ray says.
The survey was conducted by an independent research firm and polled a random sample of more than 1,000 adults nationwide about their retirement plans. A summary of the findings can be downloaded here.
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