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Life cycle options are "implicitly prudent"1 because they place the burden of building a prudent, diversified portfolio on the investment manager. "As such, these portfolios offer sponsors a separate path to compliance with qualified plan regulations which is readily defensible..."1
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"If plan fiduciaries know that many of their participants cannot create appropriate asset allocations for themselves, would it be imprudent not to offer life-cycle funds? …courts may ultimately have to decide."
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In a participant-directed plan, participants are responsible for the investment choices they make, but plan fiduciaries are still responsible for the investment choices they offer and the way they communicate these options.
The following materials should not be considered legal advice. Viewers should not act upon information contained herein without seeking plan specific legal counsel. Please see our Legal Disclaimer on our home page for additional important information.
Prudent Investment Menu Design
Some of the questions you may have considered when choosing your plan's investment options were:
- How many investment options should the plan have available?
- Does each investment option have materially different risk and return characteristics?
- Can these investment options be used in combination to create a diversified portfolio?
But did you ask...
- Will participants be able to choose the appropriate investments for their account?
When designing a participant-directed investment menu...
The challenge is to identify a range of investments that offer true choice to your
participants while considering the ability and desire of all participants to make such decisions
| The solution is: | A Well- Rounded Menu |
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Asset Class Options
The defining characteristic of asset class investment options is that employees are forced to construct their own asset allocation mix. However, many participants do not have the time or expertise to make these decisions on their own.
Even with help from asset allocation models and retirement planning tools, asset class options may not meet the needs for all of your participants. Asset class options are most appropriate for employees who have a solid understanding of investing fundamentals and time to follow the financial markets closely.
Life cycle options can complement your existing asset class options by providing participants the choice of professional asset allocation.
Life Cycle Options
Life cycle options take the asset allocation burden off of the employees. Participant decisions are kept to a minimum. An investor simply selects an objective and the ongoing asset allocation decisions are made for them right within the fund. Life cycle options can help reduce hasty reactions to market moves and reliance on conservative options because they do not require active fund selection or account management on the part of participants. Life cycle options are designed to be appropriate for participants at all stages on the investment learning curve.
Effective Communication
Overwhelmed and confused participants can make poor investment decisions.
An investment menu that clearly segments the "Do-It-Yourself" and the "Delegate" options into distinct tiers of investment options may
make the investment decision-making process easier for the average participant.
The participant must first ask:
Once this is determined, the investors can be more comfortable reviewing the investment options within the menu tiers, making informed decisions, and choosing the options that best meet their needs.
Participants can invest their account across options on both menu tiers if they want - they are not restricted.
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