PANC 2015: Optimizing the Investment Menu

At one point the trend in defined contribution retirement plans was to expand the investment menu and have self-directed brokerage accounts (SDBA) available, but with all the behavioral finance information that’s been shared, plan sponsors and advisers understand that an expanded menu often confuses participants, noted Paul Temple, senior vice president for retirement sales at Oppenheimer Funds. So, now there is a move back to simplification of investment menus, he told attendees of the 2015 PLANADVISER National Conference.

Michael A. Rosenberg, executive vice president and head of IODC distribution at Prudential Investments LLC, agrees that the trend currently is to streamline and simplify investment menus, and he adds that plan advisers are thinking about participant demographics and trying to create menus that work for each individual client’s plan. With this in mind, advisers need to have a grasp or understanding of what investment providers offer and what offerings will fit with a particular client’s participant demographics.

“Advisers will have to know more about the products in the marketplace, share classes and fees,” he said. “As an industry, we are focused on participants, who are not, as a whole, sophisticated investors, so we’re trying to understand participant behaviors and understand their challenges.”

According to Temple, one of the great developments in the industry over the past five to eight years is the availability of more information about plans for sponsors and advisers. “Benchmarking has created a lot of intelligence,” he said. “With this, we are starting to see an evolvement of the construction of target-date funds and qualified default investment alternatives.” Temple noted that this enables plan sponsors to re-enroll employees into the plan and continue to educate them, and not only with lessons about investments; plan sponsors and advisers can focus on other things to help employees with their goal of overall financial wellness, such as debt reduction and health care costs.

Steven Geisert, a senior vice president at PIMCO, added that clearly the role of the core menu is diminishing as the role of the target-date funds and qualified default investment alternatives take over. At some point, investments on the core menu become the ingredients for these custom solutions.

In addition, instead of looking at active management versus passive management, the industry is starting to look at the active/passive combination as a form of investment diversification, according to Temple.

Geisert told conference attendees the mega plan space has adopted the white label concept, rolling different managers of certain asset classes into one vehicle offered to participants. “The trend is clearly taking hold in the $1 billion-plus marketplace, but in the smaller end of the marketplace, they haven’t figured out consolidation—for example how to take five equity managers and combine them into one solution.”

However, Geisert said asset managers are trying to build such solutions for the smaller end of the market. And, participants, especially younger ones, will start to see things differently.