Winter 2007

We Really Can Help Participants Get On Target with Investment Management: We've been learning how for 25 years

By Rick Rodgers, Managing Director, InSight Employee Benefit Communications division of Innovest Portfolio Solutions

Ask defined contribution plan participants what providers, consultants and employers can do to help them effectively manage their investments, and most will tell you "I want someone to tell me what to do." Are we listening? Since the beginning of America's conversion from defined benefit plans to defined contribution plans, about two and one-half decades ago, industry professionals and plan sponsors have created and utilized a myriad of programs and methods aimed at helping participants properly and effectively manage their investments. Unfortunately, most of these programs have failed to produce their intended results for the majority of participants. But it's not all bad news - some of these programs have been effective, and we can learn something from our efforts.

In the 1980s investment menus seemed to continually increase in size, in response to demands by some, for greater choice. Perhaps we thought that a massive basket of investment choices would prompt participants to conduct independent research and develop an interest in investment management, out of necessity. Needless to say, this was not an effective solution, and most participants' investments were defaulted to a single, very conservative fund.

At the beginning of the 1990s there was a virtual industry-wide consensus to help participants invest through education. Plan providers spent millions producing glossy eye-catching materials and began conducting on-site educational seminars. In addition to fundamental investment education, there were worksheets and questionnaires to help participants identify their personal tolerance for risk, and sample or risk-based asset allocation models. These methods actually did produce positive results for those participants attending the on-site meetings. However, getting participants to attend these meetings has always been difficult and this approach was viewed by many as failure, when analyzing the success ratio relative to all participants in a plan.

Self-service and DIY
Later in the 1990s, the retirement industry continued the education theme, now with a "do-it-yourself" (DIY) spin. Participants were encouraged to educate themselves on the Internet, using interactive programs designed to help them with asset allocation and retirement planning. On paper, this looked like a great idea. If participants wouldn't come to meetings to learn and /or wouldn't read the educational materials, maybe they would teach themselves online. Many providers even began immediately converting their primary method of delivering customer service from 800 telephone access to the Internet. If it caught on with participants, providers could save a bundle in human capital by having participants teach and service themselves. However, retirement plan self-service and DIY investing never became popular among the majority of participants. Even though providers and plan sponsors spent millions on interactive investment tools, the utilization rates remain in single digits, even today.

Another trend that has evolved over the past decade has been professionally-designed and managed investment portfolios. This includes risk-based portfolios, target-date portfolios and managed accounts. Risk-based portfolios are usually a series of three mixes of investments that are designed for three different risk tolerance levels - conservative, moderate, and aggressive. These portfolios have static allocations, which means the participant must choose the portfolio that is consistent with their current risk tolerance and later move to a more conservative portfolio.

While the risk-based portfolios provide an answer to the participant requests of "do it for me" they don't respond to the "tell me what to do" request of participants, because the participant must take the initiative to determine which portfolio is appropriate today, when to change in the future, and possibly, when to make changes several times in the future.

The next generation of professionally-managed portfolios were target-date portfolios. These are a series of multiple portfolios that have different investment allocations designed for different "target" retirement years. Distinguishing the portfolios by a target retirement year makes it easy for the participant to identify and choose the appropriate portfolio. They are easier to use for the participant, because the investment mixes are dynamic, rather than static, meaning that each portfolio's allocation is automatically adjusted to become more conservative over time.

The industry's newest answer to "tell me what to do" and "do it for me" are managed accounts. This is an asset allocation service that participants access online or via an 800 telephone number. The managed account service provider creates a series of portfolios for varying risk levels. Generally, the portfolios utilize only the investments currently offered in the plan's core investment menu. When participants use an online version of the service, a risk questionnaire helps identify which portfolio to use today. Alternatively, when a participant contacts the service via telephone, a representative assists in determining appropriate risk tolerance and initial portfolio selection. Like target-date portfolios, some of the managed account services automatically adjust asset allocation over time, while other service providers require the participant to check-in periodically to review their objectives and make allocation adjustments.

All three of these options provide a professionally-designed solution for the investor. Target-date portfolios and some managed accounts also provide a professionally-managed solution. However, all of them still require the participant to take the initiative to execute, either by reading a brochure, completing a risk questionnaire or contacting a professional. This continues to be the problem that the industry keeps overlooking.

What Can We Learn?
Remember, the first sentence of this story stated that most participants will tell you "I want someone to tell me what to do." Despite creating all of these innovative professionally-managed investment solutions and making selection of the appropriate portfolio seemingly elementary, the majority of our DC plan participants are still not utilizing the services. What does participant behavior indicate? They don't want DIY. They want someone to tell them what to do.

On-site education and individual counseling are the most effective methods of assisting participants with investment management. We should use the technology and investment options/services spawned from the past decade to help professionals improve efficiency when educating and counseling participants, rather than expecting participants to subscribe to DIY investing.

Rick Rodgers is Managing Director of the InSight Employee Benefit Communications division of Innovest Portfolio Solutions. Teach him at RickR@innovestinc,com or (303) 221-5900.