401k Plan Investment Choices Need to be Monitored by the Numbers
401k plan investment choices come in many wrappers, sizes, and structures. Plan fiduciaries are responsible for monitoring 401k plan investment choices but how can a fiduciary know if they are doing a good job? A T. Rowe Price survey, the results of which we recently covered on 401kTV, found that 401(k) and 457 plan sponsors offered an average of 16.2 investment options on their investment menus in 2017, compared to 13.6 in 2008. Interestingly, research supports that most plan participants invest their savings across just 2 or 3 options, according to the survey. It would seem, logical, that when 401k plan investment choices are being reviewed, the absolute number of investment options offered to employees should be considered. More isn’t necessarily better. Unfortunately, adding more 401k plan investment choices does not seem to encourage individuals to allocate their savings more broadly across asset classes.
The T. Rowe survey findings lead the reader to ask the following questions:
- How many investment options is too many? There was a time years ago when plans routinely offered more than 20 investment options, which was far too many, according to prevailing industry wisdom.
- If the pendulum is swinging back toward offering more rather than fewer options, then why? What about fiduciary responsibility? What about fees?
- Are employers and plan service providers making sure participants have access to the information, resources, and guidance necessary to make informed investment decisions?
- What is the impetus behind offering more investment options when participants are clearly not making use of even a quarter of the funds available?
Here’s what we know: When reviewing 401k plan investment choices, there are no hard and fast rules about the “exact” number of funds to have in a retirement plan. Generally, the optimal number will fall somewhere between 15-20 options, including a target date fund (TDF). Beyond 20 funds, participants typically become overwhelmed by the sheer number of options available to them, which leads to indecision, bad decisions, or worse, no decision at all. But keep in mind, research has proven that too many funds can result not only in more confusion for employees but also lower plan participation, poor financial decision-making and higher costs.
Of course, regardless of the number of options offered, participants need and want access to guidance and advice when it comes to making retirement investment decisions. According to a study from The Pension Research Council of The Wharton School of the University of Pennsylvania, 93% of plan participants believe, unbiased, advice is important or very important, yet only 6% feel their employer is doing an excellent job of providing this. Clearly, this is a huge opportunity for employers and advisors to improve.
What’s more, spreading plan assets over a broader number of 401k plan investment choices and variety of funds can also lead to higher costs — something no sponsor wants in this day of increased scrutiny regarding plan fees. Under the Employee Retirement Income Security Act (ERISA), the law that governs retirement plans, fees must be “reasonable,” and fiduciaries must be able to prove that the services and options provided for the plan and its participants are necessary. In addition, ERISA requires that the amount and quality of the services being provided are in line with the fees being charged. Arguably, offering an excessive number of 401k plan investment choices, resulting in potentially higher costs for the plan and participants, would not be viewed as either reasonable or necessary.
If you are reviewing the number of 401k plan investment choices available in your plan and the related fees, consider a benchmarking exercise that allows you to compare your plan’s investment lineup with other plans with similar assets and participant demographics. Plan fiduciaries should benchmark their retirement plan investments on a regular basis to ensure they are fulfilling their fiduciary obligations, that they are acting in participants’ best interests, and that they are still getting the most value for their plan dollars.
It is a responsibility of plan sponsors to thoroughly evaluate their plan features, 401k plan investment choices, all plan-related fees, and make any necessary adjustments. If you partner with a retirement plan advisor, that advisor should be able to help you with the benchmarking exercise. You should continually monitor the 401k plan investment choices to determine if the number of choices is appropriate and if a better option is available.
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