Morgan Stanley
  • Wealth Management
  • Jan 11, 2023

Helping Retirement Plan Participants to Invest Their Way

Understanding how plan participants approach investing is key to designing defined contribution menus that can help improve retirement outcomes. Here’s a look at three participant profiles and potential solutions for each.

The role of retirement plan sponsors continues to evolve and become more complex. Increasingly, sponsors must balance their fiduciary responsibility for employee financial wellness with employees’ desire to choose and customize how they invest for retirement—whether they’re seeking age-appropriate options, values-driven strategies or the right mix of active and passive approaches.

Providing an investment “menu” for participants is part of this balancing act.  Thoughtful menu design is critical, as it can have a meaningful impact on employees’ retirement outcomes. While there is not a one-size-fits-all solution to plan design, there are best practices that a sponsor can use, based on their knowledge of participants’ needs and preferences.

Here are three participant profiles, with potential solutions for each, that sponsors should factor into defined contribution plan menus. 

1. The Autopilot Investor

These participants want little to no involvement in the selection and monitoring of their investment options. They set an allocation at the time of enrollment and stay the course without making material changes to it or re-evaluating their risk levels.

A solution for the autopilot investor should offer exposure to a diverse set of risk factors—such as equity, interest rate and credit risks—and adjust overall risk levels accordingly throughout the participant’s life. A common solution is an asset allocation fund, such as a target-date fund. The participant typically sets a planned retirement year, and the fund then periodically adjusts the asset allocation over time, typically reducing the participant’s exposure to riskier investments as they near their retirement date. Target-date funds have become abundant in the asset-management industry and are already widely used in defined contribution plans. 

2. The Periodic Rebalancer

These participants have some interest in investing and financial markets. They manage their retirement plan by blending multiple investment options, while periodically reviewing and adjusting allocations to better align with their stage in the retirement savings journey. While these participants like being able to select and customize their investments, they may lack the expertise or capacity to continually monitor their allocations and achieve an optimal retirement outcome.

For such an investor, a plan menu should provide a range of investment options across asset classes and sectors, allowing the participant to create a diversified strategy. The menu also should include a mix of passive and active options that allow participants to select investments based on their desired asset classes, risk appetites and overall fees. Sponsors along with their investment consultants can help guide participant outcomes through offering the appropriate range of options to build robust asset allocations.

3. The Active Tactical Trader

These participants are highly interested in financial markets and investing, and they enjoy the ability to influence their own outcomes. While they are active in reviewing, rebalancing and changing asset allocations, they generally do not seek or use guidance from their employer.

Plan sponsors may offer a brokerage window for these participants, which is distinct from the broader investment menu. This would provide them access to a full range of investment options, which they can use to create highly customized strategies. Plan sponsors and their investment consultants can help evaluate the solutions offered across various recordkeepers. Importantly, sponsors should understand that the participants who access this solution bear the responsibility of understanding the risks of the securities available. The plan itself does not generally monitor the securities available through this brokerage window solution.

Take Your Plan Design to the Next Level

To assist plan sponsors with these important decisions around plan design, Morgan Stanley has developed a robust process that is customized to each individual plan. We can help plan sponsors gain a better understanding of their participant demographics and investment preferences, which in turn can help sponsors customize investment menus to better serve participants. For instance, sponsors can expand choices to include specialty options appropriate for an older workforce or consider menu choices that align with employee values, such as those that integrate ESG strategies.

Reach out to your Investment Consultant to access our investment experience, institutional research and investment management due diligence platform.