Don’t ask 401k plan participants to make decisions they aren’t qualified to make—where the wrong choice can compromise their retirement the long-term performance of their retirement account.
That was an underlying message of a Monday breakout session at the Broadridge Fi360 Solutions Annual Conference 2021, featuring speakers Jonathan Young, John Doyle and moderator Michael Bockstie, all of American Funds.
The virtual session, titled, “Challenging Conventional Retirement Plan Wisdom,” was based on the premise that many meaningful decisions made by retirement plan sponsors arise out of beliefs that often turn out to be mistaken assumptions. The result can be suboptimal participant outcomes and greater susceptibility to lawsuits.
Much of the discussion centered around how target date funds (TDFs) and managed accounts can and should coexist within 401ks, and the evolution of default investment options.
Doyle, who is Senior Retirement Strategist, Capital Group, American Funds, said leveraging technology to provide more personalized options is necessary, but a lot of what he sees out in the market are designs simply to differentiate and not necessarily improve when the discussion should be around what can be done to improve the default options for an individual on a cost-effective basis.
“I do worry that we start to see complexity creeping into these decisions that aren’t necessarily adding value—they’re just differentiating. And we’re asking participants to make decisions where the ultimate success of the target date default process has been to take complex decisions and complex problems and simplify them for the participant,” Doyle said.
Young, who is a senior relationship manager, stressed that TDFs are not broken and continue to work very well for the masses for which they were designed. Just don’t ask them to make decisions on things like their own risk tolerance without considering that today’s answer could well be different tomorrow.
Sometimes for participants, just knowing they have choices is enough. Advisors have a “paternalistic obligation” to help participants understand this.
“We want to discourage them from making choices so they stay along that glide path. Don’t ask them to make a choice they don’t have to make,” Doyle said.
As for managed accounts? Young and Doyle agreed they’re great for those that are engaged.
“If you have a fully engaged plan sponsor, a fully engaged financial professional and a fully engaged participant, the more personalization the better,” Young said. “But the less engagement you have, defaults make more sense.”
Personalization is a great thing, Young added, but it typically comes with added complexity and added cost. A happy medium? Multiple glide paths, which provide more personalization and fit in-between off-the-shelf TDFs and managed accounts.
The discussion pivoted to core investment lineups and problems in offering too many options that run the risk of overwhelming participants.
“Less is more. But an optimized less,” Young said, pointing out that the largest retirement plan in the world, the U.S. government’s Thrift Savings Plan, has five options plus a target date series.
“We have to help participants make more informed decisions and it does help to have a more streamlined investment menu,” Young said. “When we overwhelm them with choice, bad things happen.”
Young and Doyle also discussed fees, the SECURE 2.0 bill and the potential growth of lifetime income options within plans.
Registered attendees of the virtual Broadridge Fi360 Solutions Annual Conference 2021 can watch the entire session on demand.
MORE FROM BROADRIDGE Fi360 SOLUTIONS CONFERENCE:
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
