Your Plan’s Investment Menu — Is It Optimized? A recent T. Rowe Price survey, the results of which we recently covered on 401kTV here, 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. However, the majority of plan participants invest their savings across just 2.5 options, according to the survey. So it would seem, logically, that when it comes to the number of investment options offered in workplace retirement plans, more isn’t necessarily better. It certainly doesn’t 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? (Is this like going to an all-you-can-eat buffet when all you really want to snack on is an appetizer?)
Here’s what we know: There are no hard and fast rules about what is the “optimal” number of funds to have in a defined contribution (DC) retirement plan. Generally, the agreed-upon amount is somewhere between 15-20 options, including a target date fund (TDF), so the T. Rowe survey findings are not off-the-mark. Beyond 20 funds, however, 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. As InvestmentNews writer Greg Iacurci aptly observed in a February 2018 article on the topic, “… some plans may have more, some less, and that’s not necessarily bad. But keep this 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.” Yes, all of this.
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 that 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 to improve.
What’s more, spreading plan assets over a broader number and variety of funds can also lead to higher costs — something no sponsor wants in this day and age of increased scrutiny regarding fees and related fiduciary responsibilities. 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 investment options, resulting in potentially higher costs for the plan and participants, would probably not generally be viewed as either reasonable or necessary.
If you’re thinking about reviewing the number of investment options available in your plan and the related fees, it’s a good idea. Consider a benchmarking exercise that allows you to compare your plan’s investment lineup with other plans with similar assets, participant demographics, and the like. 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. If your plan has a written investment policy statement (IPS) — and all retirement plans would benefit from having one — benchmarking is also a smart way to ensure that your plan’s investment menu aligns with the criteria and goals set forth in that document.
Moreover, it’s an opportunity for sponsors to thoroughly evaluate their plan features, the related fees, and make any necessary adjustments. If you partner with a retirement plan advisor, that person should be able to help you with the benchmarking exercise. You can also initiate a request for proposal (RFP) as a way to evaluate and benchmark specific plan vendors and determine if a better option is available.
Things are always changing and evolving, and that goes for the investment options in your plan vis a vis the needs of your participants. As such, it’s important to evaluate them regularly and make changes as needed.
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