Secondly, plan sponsors need to be confident they’re going to
have resources to support the initial restructuring and, equally
if not more important, ongoing monitoring and all that it entails.
This includes watching for unintended overlap of strategies and
making sure each underlying strategy is contributing as intended
in the overall blended portfolio. The fact is that almost every
product and design feature in the DC marketplace that simplifies
things for participants makes things more difficult for the plan
sponsor, generally through increased fiduciary responsibility. But
this is not an insurmountable barrier; rather, it’s something that
the plan sponsor needs to be ready to address either by adding
staff, hiring a manager-of-managers or retaining a consultant.
There are definitely options and external resources available.
There is also an alternative. Instead of using multimanager
strategies to restructuring the investment line-up, individual
managers could be hired to run broad, diversified portfolios
without style bias. It simplifies the investment menu without
adding complexity for the fiduciary.
But regardless of the approach taken, there are other things
to consider before streamlining the investment line-up. Plan
sponsors should clearly understand their participant population.
What’s the makeup? How financially sophisticated are they? More
importantly, how are participants using the plan? How satisfied
are they with the current line-up? There may be participants who
are actively building their own portfolios. They may appreciate
the choice in the existing line-up and the opportunity it affords
them to express a personal view on the capital markets. If
so, these participants may be dissatisfied with a consolidated
investment menu. While this probably does not represent the
average participant in most plans, it is something to consider.
The last point is just an observation about market cycles and
participant behavior. Looking back, we note that it’s not unusual
for blended funds to come into favor following a difficult market
period or a period of high volatility. Using blended funds is
a practical, effective way to remove the extremes of market
volatility for an investor. But we would caution that plan sponsors
should be prepared for the possibility that not all participants will
appreciate this kind of strategy in the future. We’re not saying
it’s a bad idea, just that participant feedback may not always be
positive. Take the late 90’s, for instance. Think about the kind of
feedback you’d get if you didn’t have a growth fund in your plan.
Doing what you think is right from a fiduciary perspective doesn’t
always prevent you from getting negative feedback from the
Peter: We’ve been focused on the core investment menu,
but I want to change the conversation just a bit. How does this
approach intersect with other important trends in DC, such
as offering custom target date funds and greater access to
alternative investments like commodities?
Lynda: It’s definitely a continuation of the trend toward plan
sponsors taking a more active role in the investment line-up.
In custom target date funds, plan sponsors are taking control
over the fund selection and asset allocation from the underlying
“We’ve been seeing
an increased interest
mostly to simplify…
with the secondary
motivation of being
able to increase
bandwidth to add
other classes outside
managers. Restructuring the core investment menu through
a multimanager approach is also pulling more control and
responsibility back to the plan sponsor.
That said, there is a major difference between the custom target
date trend and this type of customization or even streamlining
the line-up through broader investment mandates. With a
target date fund, the plan sponsor is taking action on behalf
of participants who have already expressed a preference to be
disengaged after the initial investment decision. So you’re not
taking anything away from participants. But in consolidating
the investment line-up, you may be taking control back from
participants who preferred to retain it — a potential source of
pushback. On the positive side, though, by making fewer, broader
offerings available, you’re creating bandwidth for the addition
of new funds that can lead to more real choice. In many cases,
plan sponsors are adding alternative investment classes, such as
commodities or real estate, giving participants more opportunity
to diversify beyond the U.S. equity market.
In the end, it’s really a balance. Streamlining the investment line-up, whether through multimanager funds or through broadening
the mandates, may take one type of decision away from
participants, but we’d argue that you’re giving them something
more in return. You can think of it as helping participants get out
of the weeds of U.S. equities — for example, of large-cap growth
versus large-cap core versus large-cap value — and giving them
an opportunity to make asset allocation decisions among broader
and potentially less-correlated asset classes. So for active
participants, the decision could become more like U.S. equities
versus emerging market equities versus global fixed income.
Peter: Wayne, you’ve just heard from the other panelists
about opportunities and challenges of restructuring a plan’s