How many funds should you have in your Group Retirement Savings Plan?
One of the key decisions that must be made when setting up a Group Retirement Savings Plan is the number of investment options available to the members or employees. There are really two main trains of thought:
More choice covers the diversity of the group
Since all employees are different, some employers feel it is important to give employees lots of choice. Most plan administrators have hundreds of investment options to choose from covering different managers, asset classes, regional sectors, etc.
We live in a world where the corporate world has decided that it’s important to give consumers lots of choice and options. Just go to any mall and you will see what I mean. You can find clothes or shoes in any style, color, size, shape, function, etc. All you need is to have the time to look around.
The problem with choice is it has actually paralyzed a lot of people from making decisions. Have you ever gone to a restaurant with a menu that looks more like a book with every option whether it’s fish, steak, chicken, pasta, pizza, salad or appetizer? Have you every said to yourself “Oh there’s too much to choose from, I just can’t decide.” Or maybe your decision is easy because you order the same thing every time you go there. Either way, it’s easier to make decisions the less choice there is.
With funds, a stuffy by Vanguard showed that the more options you give members in a Group Retirement Savings Plan, the more confused the members are and therefore the more education or advice they need to make those decisions. The conclusion from that study was more is not always better.
Simple is better
Unfortunately many people are just not interested, confident or knowledgeable enough to manage investments on their own. As a result, it is important in every group plan to have a set of investments that represents a packaged solution. In most cases, this means having a set of asset allocation funds or target date funds to make it easy for the members to make important investment decisions.
In my experience, these funds attract the majority of assets in the group plans that I have reviewed and managed. Typically 50% to 70% of the assets of the plan are in these asset allocation funds. This shows that most group members don’t have the desire, knowledge or confidence to pick and choose investments on their own.
A case of too many funds
Recently, I reviewed a Group RRSP plan where there was 96 investment options to choose fund. Out of the 96 funds, only 32 were being use and 87% of all the money was invested in 9 funds. That means the other 23 funds had really small amounts of money invested in them. When we talked to the members of the plan, most of them were not confident they made good investment decisions on their own because they had no support, education or advice over the past 7 years. After reviewing the plan, we implemented some changed to the investment options reducing the total number of choices from 96 to 15.
We kept the core of their Group Retirement Savings Plan with 5 basis asset allocation funds. These funds represent the meat and potatoes of the plan.
We then added a couple of investment options that have no exposure to the markets or fluctuations. This included a daily interest option, a money market fund and some Guaranteed Investment solutions.
After that, to deal with the few employees that were more involved and actively managed their portfolios, we included about 6 core individual investment options including a bond fund, a couple of Canadian Equity Funds, and a few Global Equity Options.
As a final option for the more sophisticated investors, we include a couple of niche or sector-specific funds. Typically, I only add these where this is a specific request for these types of funds because more often than not, these funds are hardly used and a source of stress because of the risk and volatility of those funds.
In my experience, I think the more successful plans are the ones with fewer investment choices. More is not always better and yes, there is such a thing as too many funds. To support this notion of less may be better, here are a couple of excellent articles from other blogs:
- Dan Hallett – The appeal for Balanced Funds
- Andrew Hallam – Can investors be too smart for their own good?
If you are going to have more plans, then members need more support and education which also seems to be lacking with most Group retirement savings plans. There’s something to be said about keeping it simple.