UK - Defined contribution scheme members need a "basic understanding of investment" to make suitable choices, Mercer Investment Consulting claims.
And it adds that education and communication are vital if DC scheme members are to make valid comparisons when selecting funds.
Mercer’s first-quarter 2004 Defined Contribution Universe Summary found the choice between active and passive funds was the key factor in determining overall fund structure.
However, Mercer feels the sheer number of funds available to DC members – in terms of investment style and asset classes – means they will not be able to make suitable choices unless they are given a “basic understanding” of investment matters.
Mercer Investment Consulting head Barry McInerney said: “While a typical defined contribution plan offers a wide variety of styles and risk profiles, having increased choice can complicate participants’ ability to properly compare performance and risk results on an equal footing.
“Each style-specific fund option is designated with a specific style benchmark to match the investment objectives of the fund. Yet comparing the plan’s active options to available passive options is difficult given the different return/risk objectives of each fund.”
Additionally, McInerney said that when selecting investment funds, DC members must be wary of making decisions based on short-term results as they rarely turned into long-term trends.
As an example, he highlighted that last year’s equity rally, which was characterised by the outperformance of low-quality stocks relative to high-quality securities, led the benchmark to outperform active managers.
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