According to research firm EBRI, equity funds are the most popular 401k investments as of 2014 but balanced funds like target dates (TDFs) are quickly picking up steam especially since they are the most popular default option. So what are the six most popular investments and what are best practices in creating a 401k or 403b investment lineup?
Most common 401k investments:
- Equity Funds at 43% popular with younger investors who can afford to take more risk.
- Balanced Funds at 25% of which TDFs make up 18% for investors that want to delegate.
- Bond Funds at 8% favored by older investors who want to take less risk.
- Company stock at 7% still popular with larger companies.
- Stable Value at 2% up to 10% for investors in their 60% also known as capital preservation funds and the least risky investment other than…
- Money Market Funds at 4% – investors actually lose money because of low returns and inflation. Laws have changed since many of these funds went belly up after the 2008-09 market collapse so check with your advisor.
Conventional wisdom had been to offer lots of choice to participants but research shows that less is better – plans with fewer funds have more participation and investors fare better. In addition, plans are starting to leverage choice architecture with three choices which include:
- “Do you want to delegate choice and rebalancing to a professional?” If yes, then all the money goes into a balanced fund like a TDF or managed account. If no…
- “Do you want to create your own portfolio and rebalance it yourself?” If yes, 7-9 fund options are offered. If they want more choice, then…
- Brokerage window which can offer thousands of investments.
Some plans like American Airlines which redesigned their menu after the merger are offering so-called white label funds named for the type of investment, not the company managing it. The white labeled funds included many underlying investments but seem simple because there is only one choice. Previously, there was a risk of overloading one asset class with participants able to choose from a myriad of funds. You could learn a lot from the choice architecture and menu design deployed by AA.
