September 2017

Inside this issue:


Millennials are the largest demographic cohort in the nation, U.S Census Bureau data shows. And up to 80 percent are already saving in their employer-sponsored retirement plans, according to a 2015 report from Bank of America Merrill Lynch.

The newest generation of workers—which the Pew Research Center defines as those born between 1981 and 1997—has exhibited distinctive attitudes and behaviors that plan sponsors and their advisors must consider when designing menus. Plan administrators, too, must rethink some long-held beliefs about participant behavior.

For starters, millennials tend to be more risk averse and gravitate toward conservative investments that they believe will be less exposed to bouts of volatility. Millennials also tend to be highly educated and research-oriented. Given these inclinations, plan sponsors should consider providing education about the benefits of long-run investing, since they have just begun their accumulation phase.

The number of millennial plan participants is likely to rise, particularly if the U.S. economy—and the job market— continue their slow but steady recoveries.

Investment Lineups

Plans geared toward millennials can offer a menu that includes conservative balanced funds, a mix of core funds and, for an added measure of diversification, funds in non-core asset classes, such as emerging markets and small-cap equities. The mix can also include a risk-managed option to help young investors build up their balances and gain experience with markets until they feel comfortable assuming greater risk levels.

About a third of millennials say that they find socially responsible investing “very appealing,” and another 59 percent say it’s “somewhat appealing,” according to a June 2016 survey by Legg Mason and Naissance. Options that include some socially responsible element stand a good chance of aligning with millennials’ social and environmental learnings.

Communication and Education

A targeted communications effort can help satisfy millennials’ appetite for understanding the different possibilities available for a given financial transaction. These materials should explain the types of investment choices available through the plan. For instance, plan sponsors can teach millennials about Roth 401(k) options, which allow them to contribute to their plans on an after-tax basis, so they don’t have to pay taxes when they cash out. That can help save total taxes, since millennials are typically in a lower tax bracket when they make initial contributions than when they are ready to pull assets from these accounts.

As millennials enter the workforce and age through it, plan sponsors and their financial advisors will need to adapt their retirement plans to suit this growing cohort. A well-considered and robust investment lineup, supported by strong communications, can help plan sponsors provide an appealing, competitive retirement plan that retains younger workers and helps them invest their way toward a more secure retirement.

This is an excerpt of Macquarie Investment Management’s article Millennial Workers Require Special Plan Sponsor Menu Design.


Some plan sponsors use plan-level rates of return to determine the quality of an investment lineup. However, several variables may impact plan-level rates of return making them not as useful as a plan management tool. This approach may be inappropriate when trying to determine the quality of an investment lineup due to participant investment selection. As an extreme example, you may have a lineup full of excellent mutual funds, but if your participants have 50 percent of their plan assets in a cash account, the plan’s effective rate of return would suggest a poor investment lineup. Furthermore, a reasonably well-funded plan with an appropriately conservative fund menu would have an average rate of return appear sub-par during a bull market.

There are many other examples, most of which revolve around participant behavior (poor diversification, market timing, etc.) effecting a composite rate of return for the plan. We all recognize that participants consistently may not make optimal investment decisions, but imprudent participant investing should not color the quality of the investment menu.

A better idea is to focus on the investments that are designed to reflect the plan’s goals, objectives and participant demographic a well-selected target date fund (TDF). The TDF return rates, over a reasonable time period, make more sense for comparative purposes. These options are already optimized in terms of asset allocation and divisible by age group to obtain a more risk-based conclusion. Lastly, many experts project that the vast majority (more than 80 percent) of defined contribution assets will be in TDFs by 2020¹, which makes this evaluation even more meaningful.

¹Center for Due Diligence.


Return-based style analysis (RBSA) draws from Bill Sharpe’s style analysis model, which stipulates that a manager’s investment style can be determined by comparing the returns on a portfolio with those of a certain number of selected indices. Through quadratic optimization modeling, RBSA is an effective way to test whether a fund maintains its professed style mandate. RBSA examines a fund’s style over a period of time and tells how the portfolio’s returns behave, rather than the stocks the portfolio is actually holding (holding-based).

Holding-based style analysis (HBSA), by contrast, analyzes each of the securities that make up the portfolio. The securities are studied and ranked according to different characteristics that allow their style to be described. The results are aggregated at the portfolio level to obtain the style of the entire portfolio. Where RBSA is typically applied over a specified period, HBSA is typically conducted at a single point in time.

Reasons why we use return-based over holding-based style analysis:

  • RBSA is easier to conduct: All that is needed is the portfolio’s return stream and a representative set of indices for analysis.
  • Period of time vs. snapshot: RBSA looks at the portfolio over a period of time. Holding-based is a snapshot of a single point in time.
  • Better predictor: If the aim is to predict a fund’s future returns (in a certain style), factor exposures seem to be more relevant than actual portfolio holdings. This reasoning gives advantage to RBSA.

Overall, we believe that HBSA is a more tedious and time-consuming approach. Holding-based is more of an accounting-driven approach, which stresses characteristics and categorization, rather than return behavior.

No strategy assures a profit or protect against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

For Plan Sponsor use only – Not for use with Participants or the General Public. This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. 

Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

Montgomery Retirement Plan Advisors offers investment advisory services through Independent Financial Partners, a Registered Investment Advisor. Independent Financial Partners and Montgomery Retirement Plan Advisors are separate entities.

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Montgomery Retirement Plan Advisors offers investment advisory services through Independent Financial Partners, a Registered Investment Advisor. Independent Financial Partners and Montgomery Retirement Plan Advisors are separate entities.