A Framework for Designing Investment Strategies for Default Retirement Plans

Abstract

We identify and discuss four key elements to address when designing the investment strategy for default retirement plans: whether to cater for member needs or their wants, objectives, the member for which the default is being designed, and risk appetite. Addressing these design elements requires making assumptions about the member, of which the literature provides limited guidance to plan sponsors. We outline the main assumptions and demonstrate the potential impact on retirement experience through illustrative models. We find that mismatches between the member and the way that they are characterized can adversely impact on welfare.

TOPICS: Long-term/retirement investing, retirement, portfolio management/multi-asset allocation, portfolio theory

Key Findings

• ▪ We identify and discuss the elements that retirement plan providers should address when designing investment strategies for default members, highlighting the issues and challenges involved.

• ▪ The four elements are: whether to cater for member needs or their wants, objectives, the member for which the default is being designed, and risk appetite.

• ▪ Illustrative modelling underlines the importance of assumptions about objectives and risk appetite.