Your Retirement Plan has HOW MANY Investments?
While many things have changed in my 25 years at Cammack Retirement, some things have remained the same. One of those is the tendency for retirement plan sponsors to offer too many investment options to their participants. It is not unusual to come across plans with tens, or even hundreds, of investments, when a few dozen would suffice. In fact, if you are reading this, chances are your retirement plan offers too many investments. I have never come across a plan that offered too few!
Why are too many investments a bad thing? The primary reason is that most employees are not investment experts; and more importantly, do not want to be investment experts. They have zero desire to sort through the plethora of large-cap growth funds in an investment array to determine which one is just right for them, and then repeat this exercise with every other investment in the array. Hopefully, they will stumble upon a target-date fund offering (presuming there is one); otherwise, they might just say “the heck with it” and not participate in the retirement plan at all, especially if they are younger (when, of course, it is critical to participate, due to the time value of money).
Okay, that seems simple enough — lots of investments mystify most participants and discourage engagement in the benefit. So why do most plan sponsors persist in offering too many investments? The dreaded “employee disruption” is a common refrain we hear from plan sponsors. They fear that participants will come looking for them with pitchforks in hand if they dare to remove a “favorite” investment. But, I will let you in on a little secret: Do you know how many times in my 25 years that I have seen participants revolt against a reduction in investments? Zero. In fact, the most common participant reaction is apathy, followed by happiness that someone finally made an effort to simplify something that has always been quite complicated.
Will there be a handful of participants with financial backgrounds who might protest when their favorite funds are taken away? Absolutely. But a fund is generally removed from an array because either its performance is terrible, it is not suitable for a retirement plan (e.g., certain sector/commodities funds; it is expensive; it is nearly identical to other funds in the array; no one uses it; or all of the above! In these cases, a simple explanation of the due diligence process that was used to eliminate the fund in question should go a long way toward addressing any complaints.
Editor’s Note: Mike Webb has now joined the Twitterverse, so be sure to follow Mike (@MikeWebb_CRG) to enjoy the latest retirement plans news and insights in 140 characters or less!)
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Investment products available through Cammack LaRhette Brokerage, Inc.
Investment advisory services available through Cammack LaRhette Advisors, LLC.
Both located at 100 William Street, Suite 215, Wellesley, MA 02481 | p 781-237-2291