US - Strong gains in equity markets in 2003 has increased the demand for US employers to offer their employees a greater choice of equity funds.
However, while the inclusion of equity options, such as sector funds, may appeal to a select group of participants, these options may be inappropriate for the majority.
“The increased number of investment options is a double-edged sword for participants,” said Barry McInerney, head of Mercer Investment Consulting in the US.
“Sponsors face the difficult challenge of balancing the need to offer participants enough choice to build their retirement portfolios, while at the same time optimising the number of fund options and not being drawn into offering the flavour of the day.”
Sponsors must weigh up the benefits of adding additional funds against the stated intent of the plan, and in many instances they may conclude that the inclusion of higher risk options may be inconsistent with this goal.
For the participant there is the danger that they create a higher risk portfolio due to a high concentration of funds with similar investment styles, or at the other end of the spectrum over-diversify their portfolios making lots of small bets.
“Over the years the trend in defined contribution plan management has been to increase the number of plan options in order to meet participants’ demands,” said McInerney.
“The challenge for plan sponsors is to structure a retirement programme to meet the objectives of the participants while balancing their fiduciary responsibilities as the sponsor of the plan.”
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