Should you offer member investment choice?
It is becoming common-practice to offer member choice, allowing employees to choose from a selection of investment managers and funds. Members unable or unwilling to choose are usually invested in a “default fund”. From past research it appears that around 80% of employees typically end up in the default fund.
The issue of choice is controversial, not only because few employees exercise it, but because few of the remaining employees exercise it appropriately.
If you offer member choice with a default fund, you should therefore ensure that the default fund does not have a “one-size-fits-all” asset allocation policy. Invariably, such a policy fits no one really well. At 10X, we believe that you should rather opt for a fund that follows a life-stage asset allocation policy.
A further problem with choice is that it does not come free – the administration charge is loaded with the cost of providing choice. This cost is charged to all members, whether they exercise it or not. To the extent that the majority of members do not exercise choice, it is an unnecessary and avoidable cost.
More about starting a retirement fund
- Legal structure: umbrella or stand-alone?
- Product: Pension or provident fund?
- Who should be eligible to join? Membership criteria
- How much should you contribute? Contribution rates
- Should you attach risk benefits to the fund?
- Who does what? Service providers
- Governance: Board of Trustees and Principal Officer
- Specifics: Fund rules
- Should you offer investment choice?
- Should you offer a preservation fund option?
