A framework to calculate the benefits of a plan reset for plan fiduciaries

Individuals who make their own investment decisions in a defined contribution retirement plan often do not have appropriately diversified investment allocations for their age. These inappropriate allocations can be costly under normal circumstances. In a volatile or bear market, those costs can increase significantly.

By offering a way to reset a retirement plan to the default investment options, plan fiduciaries can help guide self-directed investors back to age-appropriate investment allocations. In this white paper, we review the ways self-directed investors’ decisions deviate from the benchmark. We then establish a way to estimate the annual benefit to investors from a plan reset and provide a framework to help individual plan sponsors determine if a plan reset is appropriate given their plan population.

Key findings:

• In general, self-directed investors lose one basis point in utility for every percentage point of deviation from their ideal equity allocation.
• On average, self-directed individuals across different age groups lose approximately 64 basis points of expected return compared to the default investment when risk is controlled.
• Plan resets can be an effective tool to mitigate losses related to less-than-optimal diversification strategies pursued by self-directed investors.

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