Last year, a colleague and I represented State Street Global Advisors at a client’s participant retirement fair. It was your typical setup: three or four investment manager booths adorned with a company banner, and well-suited, well-heeled experts standing behind each table ready to share high-level knowledge, fund fact sheets and logoed tchotchkes. Plan managers and HR staff expected employee attendance to be well in the hundreds. It was early September, and not only were they embarking on open enrollment season, they were making major changes to their plan that involved, among other things, a total re-enrollment into target date funds. As manager of a majority of the client’s core menu options, we weren’t expecting to see many people at our table.
Boy, were we wrong.
At one point, our table became flooded with employees — and they weren’t just eager for State Street-branded fidget spinners. Many wanted to understand the existing and new core options being offered. They asked questions about past performance. They asked for, and took with them, the printed fund fact sheets we’d brought along. They were older, and appeared to be highly engaged.
And they’re not the only ones.
While the majority of DC plan participants are invested in the default (usually a target date fund), most of the plan assets are held in the stand-alone core index options; a phenomenon that can largely be attributed to participants over 50 (Baby Boomers and older Gen Xers).2 So why does this group — the pre-retiree crowd — favor building their own retirement portfolio via core menu index funds over investing in a “set it and forget it” target date fund? With an increasingly short time horizon to save, pre-retirees may feel an added urgency to catch up using a more aggressive investment approach and may look to an a la carte menu. Or, maybe it’s a case of inertia. Or, they just don’t understand target date funds. Whatever the reason, it’s important to recognize that for any participant, and especially pre-retirees, sole use of the core menu could have unfavorable implications for retirement readiness if proper education and engagement are not instilled.
That’s not to say a DIY approach to retirement investing is a “bad” thing: After all, a typical DC core index fund lineup features the same asset classes found in a target date fund — a mix of US and non-US equity funds, fixed income and maybe a cash option. So it certainly offers the building blocks that a participant might need to create a diversified, risk allocated retirement portfolio — provided participants know what they’re doing.
With financial literacy in the United States at an all-time low, however, many are not investment-savvy enough to act as their own portfolio manager. If a large percentage of people cannot identify the difference between a single stock and a stock mutual fund,3 it’s reasonable to assume that many also lack the know-how to allocate across asset classes or rebalance those allocations — two crucial functions in retirement investing. As it is, the average number of funds participants use when investing in the core menu is only 2.5, indicating a serious lack of diversification.4