In the realm of defined contribution plans, it’s essential not to underestimate the significance of crafting a well-balanced investment menu. This involves considering a multitude of factors, from the overarching plan objectives to the demographics of plan participants. For instance, adhering to the “90-10-90” rule coined by UCLA Professor Shlomo Benartzi is a valuable starting point, emphasizing high participation rates, adequate deferral percentages, and a substantial number of participants in professionally managed investments. Demographics, including the age, income, education, and tenure of workers, play a pivotal role in shaping the ideal menu. Additionally, default options are a key aspect to address, especially with the growing use of auto-enrollment. It’s crucial to strike a balance between professionally managed options and other choices, considering that managed accounts are gaining traction, but personalized Target Date Funds (TDFs) can also offer a middle ground.
Furthermore, plan sponsors should contemplate factors like the choice between index and active funds, with a recognition that not all average active funds outperform their index benchmarks. Retirement income options, although beneficial for older employee populations, are often underutilized. Menu size should be optimized, as excessively large menus may invite litigation and complexity while offering minimal value. Environmental, Social, and Governance (ESG) investments and alternatives, such as private equity, spark considerable discussion, but caution prevails. Lastly, the choice of an investment wrapper, whether it be mutual funds, collective investment trusts, or separately managed accounts, should align with the plan’s size and specific needs, considering factors like cost and flexibility.
Read more about this in Fred Barstein’s Wealth Management column this week, “The Ideal 401(k) Investment Menu.”
