Should participants only be invested in one target-date fund for the product to work effectively in providing successful retirement outcomes?
It’s a question Morningstar recently tried to definitively answer (yes). Regardless, there is a “significant subset” of participants who prefer more control in building their own portfolios and don’t view investing in a single TDF as right for them.
A new study from Invesco called “The Forgotten Participant” finds these participants intentionally allocate across TDFs and the core menu in an effort to diversify and fine-tune their risk level.
“These are the Forgotten Participants that DC decision-makers often overlook,” according to the company. “They approach decision making with limited investment knowledge and often with overconfidence. This can lead to poorly constructed portfolios that may not be systematically rebalanced, properly diversified or in line with how much (or how little) risk a participant is willing to take.”
Indeed, in an asset allocation exercise among focus group participants, only 6% invested in a single TDF, and 71% of participants are/plan to be moderately to aggressively invested 10 years away from retirement.
“Many TDF glide paths may not offer the amount of risk these participants want to take,” the authors write.
Managed solutions
There is also a healthy appetite among Forgotten Participants for a professionally managed solution tied to their investment risk profile.
“This segment of participants in the study appreciates the help in maintaining a level of investment risk appropriate to their needs and making investment decisions easier. To that end, a majority were interested in a suite of well-diversified, professionally managed options tied to risk tolerance, not just their time horizon.”
Fully 65% of all participants felt that a risk-based solution would be a good fit for them, personally, and 80% of higher-income participants would invest in risk-based strategies.
As for sponsors, 64% are interested in adding risk-based strategies to the investment menu “as they allow participants to take the amount of investment risk that meets their needs; and feel they would be appropriate for a segment of their participant population and serve as a ‘middle option’ between TDFs and the core menu.”
Dynamic risk profile
Lastly, there is substantial interest among participants and plan sponsors for a dynamic risk profile tool that helps with decision-making and increases engagement.
- 72% of participants would be likely to invest in risk-based strategies if simple, easy-to-understand resources are available to help them select the right strategy.
- For those who originally felt the strategies were not a good fit for them, 49% say they would likely invest in risk-based strategies if given these resources.
- 2/3 of participants are interested in an online tool to specifically help measure risk tolerance and suggest investment options.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
