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Menu Design Needs Process Heavy Approach

Menu Design Needs Process Heavy Approach.  As a result of the DOL fiduciary regulations, advisors will be required to act as a fiduciary to retirement plans. Consequently, the industry has experienced increased interest in plan sponsors seeking a 3(38) investment advisor, with 47% of advisors serving in this capacity, a significant jump from 20% in 2011 according to data from Ann Schleck & Co., an affiliate of fiduciary consulting firm Fi360 Inc.

There are numerous benefits to hiring a 3(38); most frequently mentioned is faster implementation of advice given because the fiduciary responsibility of selecting, monitoring, and replacing managers is up to the sole discretion of the 3(38). It’s important to note the plan sponsor still has a fiduciary duty to monitor the 3(38) service provider.

With the growing 3(38) role, competition is naturally increasing and 3(38) fiduciaries are looking for ways to distinguish their services. A largely overlooked opportunity in differentiating services is choosing to incorporate plan menu design into one’s value proposition.

Considerations to designing plan menus can be used to substantiate the decisions made and further prove the value a 3(38) can really add to a plan sponsor. Digging deep into the characteristics of the plan participants can help illustrate the thought process behind each 3(38) decision and instill confidence in plan sponsors that the 3(38) role is taken seriously.

Here are 5 considerations to incorporate into a menu design process to substantiate value:

  1. Auto Enrollment
    • Does the plan automatically enroll or re-enroll participants? This can be a reflection of the amount of control that participants desire. Plans with automatic features default the majority of participants into a target date fund or other multi-asset class option. Participants who want to make their own asset allocation decisions must affirmatively opt-out of the default options. Requiring the extra opt-out step makes plans with automatic features more effective at ensuring that participants who want more control are actively making that decision.
  2. Access to Individualized Education
    • Many participants are overwhelmed by the complexities of investment decisions. However, educational resources and individualized financial advice can help alleviate confusion and empower participants. Documenting these points of contact can substantiate reasoning of certain menu design elements.
  3. Investment Background
    • A participant’s background from previous professions, studies, and interests can translate into decisions made for their retirement plan. Being able to understand and assess participants’ investment knowledge can help direct plan menu decisions.
  4. Age Clustering
    • The spread of ages in a plan’s demographic can influence the variety of options that are most appropriate. For example, as participants approach retirement they are more likely to have specific investment objectives like capital preservation or income generation that require exposure to specialty asset classes.
  5. Retiree Behavior
    • An increasing number of retirees may keep their savings in their former employer’s 401(k) rather than rolling the assets into an IRA. Menu design investment options should reflect possible solutions to some of those retiree circumstances.

Fiduciary Tip: Incorporate menu design philosophy into your client’s IPS. Specific plan features or participant demographics can be documented in committee meeting minutes.

Are you a 3(38) or 3(21)? We’d love to hear from you! Access more insight on plan menu design here.

by Shelby George, JD, CEBS / Senior Vice President, Advisor Services

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