Retirement plan providers have put a significant amount of effort into meeting the needs of participants who want or need professional management of their retirement savings. Almost all plans today offer a selection of target date and/or target risk funds and many offer a managed account option. There are a variety of reasons that participants have directed an increasing proportion of their contributions into target date and target risk funds. Some realize they are not educated about investing and like having professional management, others do not have the time or inclination to manage their own investments, and some went into asset allocation funds through automatic enrollment and are content to stay with them. This works for a portion of participants, but what about those who want to manage their own money?
Diversification is the primary principal stressed in participant education sessions. The structure of typical target date and target risk funds illustrates this. For example, a family of target date funds offered by a leading provider is based on 37 individual funds representing 20 distinct asset classes. Depending on the retirement date targeted, not every one of these may have an allocation, but most are included in all funds in the family. A typical plan offered by this same provider includes the five target date funds, three target risk funds and 25 other funds. This is not unusual. Many plan sponsors limit the number of funds they make available in their plans so as not to overwhelm participants. The result is that, unless the sponsor includes a brokerage window, the Do-It-Yourself (DIY) investor has a considerably narrower range of choices than the professional manager handling the target date and target risk funds.
The real key here is that sponsors and provder sales people need to consider the nature of the workforce in deciding on the range of funds to includes. If there is a high proportion of college educated and technical employees, such as engineers, the range of funds offered needs to be enlarged.
Spectrem Group research has shown that these type employees include a higher than average percentage of those who want to manage their own investments. This need for broadening the range of funds available is particularly important in terms of bonds funds (e.g., high yield, international) and speciality funds (e.g., real estate, sector funds). Target date and target risk funds do a very good job of providing those who use them with a broadly diversified, professionally managed option for their retirement savings. There will always be some participants, however, who want to do it their way. They need a range of options that will allow them to do so.