DC Investment Consulting

An Investment Consulting Case Study

On being appointed as the consultant to a large defined contribution scheme, we were asked to complete a full investment review of the funds that were offered to members. At the time, 90% of members were directing their contributions to the default fund solution, but members had a choice of 16 alternative fund options.

The guiding principles established by the Trustees were:

• Ensure that the range of investment funds reflect the various needs of members.
• Options needed to be easy to understand, implement and manage as members move toward retirement.
• Members need "real" choice - it should be easy for members to distinguish between each fund in terms of the expected risk and potential return. This should also help members to avoid selecting a fund based on past performance.
• Avoid thematic or specialised investment strategies (i.e. Technology Fund, Irish Equity Fund). While these funds might offer the potential for enhanced return or diversification, it is more likely that members would need advice from an investment professional to determine the ideal allocation and decide when to move in or out of the strategy.
• Members should not feel overwhelmed or confused by the choices that are presented.

A full review of the scheme's current investment platform revealed numerous opportunities to rationalize the current range of funds and introduce a new and innovative approach to help members understand their options and select the right funds.

Elements of the new investment strategy included:

• Tools, graphs and questionnaires to guide members toward the funds that match their personal investment goals.
• Multiple lifestyle strategies that allow members to choose funds based on their personal risk tolerance and retirement strategy.
• A default strategy designed to have lower expected risk than the typical Managed fund and which automatically reduced the exposure to higher risk investments as members approached retirement.
• Practical and innovative charts and descriptions to help members chose funds based on their personal risk tolerance rather than peer group or past performance.

The investment review and communication exercise was implemented over 3 months. At the end of the process, 50% of members had made an active decision about which fund they wanted to invest in and members had a choice of 7 distinct investment funds to choose from.