Back in 1709, the poet Alexander Pope wrote that a little learning is a dangerous thing and a new study of defined contribution pension plan members finds this proverb still holds true today.
The Invesco study, which compiled responses from 110 U.S. plan sponsors and more than 2,000 DC plan members, found that, while some DC plan members were quite bullish about making their own investment choices, they don’t necessarily have the expertise to understand their choices. However, there’s a hunger for choice — only six per cent of plan members in an asset allocation exercise, for example, invested in a single target-date fund.
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While 65 per cent of all plan members felt that a risk-based solution would be a good fit for them, 68 per cent said the don’t really understand the investment options they had personally selected. Only a third (33 per cent) said they’re confident that their investment mix is the right mix to help them achieve their goals. And 62 per cent said that “guessing or going with their gut feeling” was a factor when choosing their investment options.
“Despite their best intentions, we . . . found some participants [are] making financial decisions in their retirement plan with admittedly limited financial knowledge, which could be of significant fiduciary concern for plan sponsors,” said John Galateria, managing director and head of North America institutional for Invesco, in a press release.
With high appetite for more choice, 64 per cent of surveyed plan sponsors said they’re interested in adding risk-based strategies to their investment menus to serve as a middle option between target-date funds and the core menu, noted the study.
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“The addition of risk-based strategies can help strengthen a plan sponsor’s fiduciary standing, and also provide a guard rail for participants who lack the time and knowledge to create a diversified portfolio from core menu options and rebalance regularly,” said Galateria.
The study also found DC plan members seem open to guidance, as long as it’s easy to understand and access. Most (72 per cent) participants said they’d be likely to invest in risk-based strategies if simple, easy-to-understand resources were available to help them select the right strategy. Meanwhile, two-thirds said they’re interested in an online tool to specifically help measure risk tolerance and suggest investment options.