Can sponsors help participants choose better investments?

Despite the popularity of one-stop target date funds, about 63% of retirement plan participants still choose their own investments. But the average investor earned significantly less than the stock or bond market averages.

According to a 2016 Dalbar research study, the average equity investor received a 4.23% average annual return over the past 10 years ending December 31, 2015. That compares to a 7.31% average annual return over the same time period for the S&P 500, an index that is seen by many as reflective of the overall stock market.

It's even worse over 30 years, with an average investment return gap of 6.69% per year.

And it's not limited to the more volatile stock market. Over the same 10 years, the average fixed income investor received 0.39% per year vs 4.51% for the comparable Bloomberg Barclay's Aggregate Bond Index.

SIMPLIFY MENUS TO SUPPORT BETTER PARTICIPANT DECISION-MAKING

Some people look at the success of target date funds as a model. In less than 10 years, target date funds have become the dominant investment in 401(k) and other defined contribution plans. A key reason is simplicity: all a participant has to know is their age to make an investment decision. Everything else is done for them.

Similarly, plan sponsors can simplify the choices in plan menus using participant's age as a foundation:

• Reduce participant anxiety about too much choice by selecting fewer funds in broader investment categories.

• Make the investment choices relevant to participants by organizing them based on the two stages of retirement planning: saving/growth and spending/income.

• Create incentive for participants to save by re-labelling the menu options around their real-life, time-based goals.

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