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ICMA-RC Participation Education

Author: Joan McCallen, ICMA-RC

If every individual participating in his or her employer's 457 or 401 plan was beating the market every year - maybe even capturing double-digit returns - then they'd all be long-term investors, right?

Truth is, of course, investing is far more challenging. Short- and long-term market performance is only one issue for individual investors to ponder. There are also factors such as objective-setting, asset allocation, rebalancing, risk tolerance and more. When markets are choppy, directionless or declining - all conditions investors have endured at one time or another over the past few years - it can be discouraging. People tend to forget that saving and investing for retirement are decades-long pursuits.

Plan providers are taking many steps, both directly and indirectly, to keep plan participants in their plans. Industry leaders consider this to be such a high priority that they have made it a goal to establish and maintain long-term relationships with plan participants with the objective of helping them not only with retirement security, but with securing a sound financial footing overall.

In many ways, client education is an effort in which everyone is involved in some way. Whether it's maintaining an up-to-date Web site design or revamping quarterly account statements, providers are concentrating on educational efforts to maintain close relationships with their participants.

One new means of educating participants while relieving the burden of investing is through the growing use of target-based investment options. In these funds, usually composed of other fund offerings in the plans, asset allocations are preset based on the number of years until maturity. As the fund grows closer to the target date, the fund is reallocated to grow more conservative, consistent with the shorter time horizon. The actual allocation within the fund is periodically rebalanced to maintain the fund's risk level.

For example, if a person plans to withdraw funds in 2025, the allocation today may be along the lines of 21 percent fixed income and 79 percent equity, because the investor can take advantage of long time horizon to access the higher potential for equity returns, while still having time to recover from market setbacks. For someone planning to retire in 2010, the allocation might be more conservative, for example 52 percent fixed income and 48 percent equity.

These types of funds are particularly appropriate for public sector employees because often the "retirement" date - when they leave service - is not the same time that they intend to access the account. This might especially be the case for someone who is taking early retirement but may intend to continue working in a different job or have access to alternative sources of income.

Plan providers are continually developing new products, such as target-date funds, to meet the changing needs of participants. They are also continually seeking to help employers answer the question they hear so often from their participants: "How should I investment my retirement assets?"

Joan McCallen is president and chief executive officer of ICMA-RC.