This issue of Ideas, which looks at asset allocation as a part of retirement readiness, covers the following topics.
For the full report, download the publication.
Asset allocation is a vital aspect of retirement readiness. Employees who allocate their defined contribution (DC) plan assets inappropriately or — perhaps even worse — fail to make allocation decisions run the risk of being financially unprepared to retire when they want.
Even small changes in asset allocation can have a significant impact on employees’ ability to retire comfortably. Few organizations pay attention to how their employees allocate their DC plan contributions and current assets.
Due to fiduciary responsibilities,1 most are reluctant to appear to be giving investment advice. Nevertheless, employers can use targeted internal communications and other tactics to help their employees understand asset allocation and empower them to make better choices.
Sibson Consulting can help organizations gather, format and communicate asset allocation information to their employees.
The goal is not to provide employees with investment advice (which should only be given by advisers registered with the Securities and Exchange Commission), but to give them the information and the opportunities they need to make informed decisions, thereby improving their chances to be financially prepared to retire when they choose.
Most employees find asset allocation extremely confusing. Left to their own devices, they often make less than ideal decisions.
This can include adjusting their allocations at the wrong time, chasing returns, not responding to changes in their lives and investing too much in stable-value funds or company stock.
Employees have also been known to place small amounts in too many target date funds (TDFs) and make inappropriate investments through mutual/brokerage windows.
To see how just a 1 percentage point difference in average annual return on retirement savings can make a difference, see the data in the full report.
Educating employees about asset allocation can be challenging for a variety of reasons.
Organizations are appropriately reluctant to appear to be offering investment advice.
Some organizations rely on plan averages to assess the overall investment landscape of their employees. These aggregate results may not identify individual issues.2
Of course, a number of outside factors, of which the organization is probably unaware or unable to quantify, may also affect retirement readiness.
These include personal investments, IRAs and other retirement accounts, retirement plans from former employers, home equity, Social Security benefits and debt.
The employee’s partner, if any, probably also has financial factors that may affect their retirement readiness as a couple.
Organizations may want to consider embarking on a two-pronged process:
To understand more about their employees’ unique circumstances, organizations can gather readily available data. This includes age, salary, and allocations of contribution rate/amounts, including catch-up contributions.
They can also look at each employee’s 401(k) plan balance relative to age and/or salary and risk compared to age and peers. It is important to be aware of individual investment choices and loans, if any.
While it may not be possible to have a complete picture of an employee’s financial situation, the more information the better.
In the full report, you’ll find an example of how Sibson evaluated a mid-size tech organization’s DC plan participants’ investment decisions for appropriateness.
Most organizations monitor their employees’ DC plan participation to satisfy their fiduciary responsibilities and to help their employees succeed. They also track deferral levels, account balances and investment lineup.
However, most organizations pay relatively little attention to the subject of asset allocation. This means many employees fail to understand its importance or how it works.
Nevertheless, they make asset allocation decisions that have a major long-term impact on the financial health of their retirement plans.
Because asset allocation is so important, organizations should elevate their focus on educating employees about how their decisions affect their DC plan account balances.
Helping employees make informed choices will significantly improve the likelihood that they will be able to retire comfortably when they want to.
For more information about retirement readiness and/or to discuss how Sibson can help you help your employees prepare to retire, contact your Sibson consultant or one of the following professionals:
Senior Vice President
For more information about staying ahead in today’s rapidly changing investment landscape, contact your Segal Marco Advisors consultant or the following professional:
Senior Vice President
1 Meeting Your Fiduciary Responsibilities, Employee Benefits Security Administration, September 2017
2 For more information, see Sibson’s June 2018 Ideas, “Are Your Employees Saving Enough for Retirement?”
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