The majority (63%) of employers offer over 20 investment options to defined contribution (DC) scheme members while only 12% offer no default investment option.
The Aon Hewitt Employee Benefits and Trends Report, which surveyed 485 employers on various issues relating to employee benefits and pensions, warns that this array of investment choice may affect employees’ ability to engage with their pensions because too wide a range of options – without necessary guidance – may cause confusion.
It also says that, with 12% of companies not offering a default option, members may be wary of making decisions that they do not fully understand, or which may not suit their personal circumstances.
The research also finds that employers continue to introduce new investment options. In the past year, among schemes which introduced new funds, a third of them introduced a socially responsible or ethical option and a quarter introduced Shariah-compliant funds.
John Foster, DC consultant at Aon Hewitt, said: “While at a surface level, introducing greater choice is seen as a positive step by employers, this does not necessarily encourage scheme members to understand and fully value their pension.
“Being faced with so many investment options can be confusing and overwhelming, to the extent that some members will end up making no choice, or perhaps worse, make a random choice.
“Furthermore, for those confused by the choices of investment, some employers still do not offer the option of a default fund, though this will become compulsory if the plan is to be used for auto-enrolment.
“Employers and trustees should make every effort to engage their employees and members with their pensions and aim to provide the information needed by scheme members to make informed choices suited to their age, expectations and attitudes to risk.
“At a time when everyone’s finances are under pressure, employees need to ensure they understand the decisions they are making in order to maximise their retirement income.”
“Also, given that employees are faced with a choice of funds, it is sensible to have a default investment option available for consideration, as well as having the necessary governance framework in place to ensure that as funds are added, others are removed if they cease to perform, or if they no longer fit within a clearly defined and articulated investment strategy.”
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