Better Engagement
The defined contribution (DC) industry has gone from one extreme to the other when it comes to helping participants select investments. We started by trying to educate people on investments letting them create their own investment portfolio and then moved to target date funds (TDFs) where the portfolio is assigned to them based exclusively on their age. But is there a middle ground? How do sponsors achieve better engagement?
At a TPSU program held in Atlanta and conducted by Adjunct Lecturer Paul Powell, a plan sponsor from a small car dealer found that by using a “guided” portfolio, not only were people better invested but they became more engaged in the entire process. The process includes people taking a short risk tolerance questionnaire at enrollment meetings and then choosing one of five portfolios based on the level of risk indicated by their test results.
This process, the plan sponsor found, not only takes the guesswork out of selecting investments, people are more eager and likely to get engaged on more important decisions like deferral rates. Before, people just shut down because they had no idea which investments to select. After, they select the “easy” button and are more willing to engage.
Some may argue, why bother? Just put everyone into TDFs – no engagement needed. But is taking all engagement from DC plan participants a good thing? No one is suggesting that we should eliminate enrollment meetings which can lead to one on one engagement, so why not start with a risk tolerance test which everyone can pass rather than waste time explaining about how people can make the selections themselves?
Critics of risk tolerance funds say that people’s tolerance depends on market conditions – how many people would have been willing to take risk after the 2008-09 market crash? And shouldn’t risk change as we get closer to retirement. Let’s be bold – why not combine risk and age? Offer a series of TDFs that differ by age group depending on their risk tolerance. Sound far-fetched? These types of TDFs are available today.
