Today, many defined contribution plan sponsors take a “less is more” approach to core menu design out of fear that employees would either invest inappropriately or not invest at all if faced with too many options. However, these risks, although valid, have decreased significantly due to the adoption of investment defaults. Instead of having participants select investments from the retirement investment menu on their own, many plans will place their participants into a default investment option, such as a target-date fund or managed accounts. The remaining participants still using the core menu are typically more investment savvy and are fundamentally different from those who use target-date funds.
Even though the type of investor that the menu serves has shifted to a smaller savvier group, the typical core menu has not evolved in at least a decade, and still reflects an outdated need to minimize the risk of turning off participants. Because it no longer serves the greater population of participants, core menus should evolve to better serve these remaining “do-it-yourself” savvy investors who could potentially benefit from more diversified options. Below are three tips to consider when updating your core investment menu:
1. Changing the Retirement Investment Menu
Approach Since the “more-is-better” approach created choice overload and led many participants to inaction, plan sponsors today commonly take the opposite approach when creating investment menus. But as we’ve discussed before, the type of investor using the core menu has changed and thus, plan sponsors should also consider changing their approach to one that focuses on breadth, not depth.
2. Reducing Redundancy
When choosing funds to include within a core menu, one major key is reducing redundancy. It’s not necessary to add several options within a single category (i.e. three large-cap growth funds). Instead, plan sponsors should aim to provide as much diversification in categories and asset classes.
3. Increasing Investment Menu Variety
Offering a more diverse core menu could possibly lead to significant potential improvements to portfolio returns. With this in mind, plan sponsors should be building an investment menu, not with the goal of achieving a certain number of investment options, but with providing as much variety as possible. Some diverse options to consider adding could be Treasure Inflation Protected Securities (TIPS), Real Estate Investment Trusts (REITs), as well as funds focused on emerging markets.
If you’re looking to improve your plan’s core menu, just keep in mind that simply expanding offerings is often not enough—breadth is better than depth. Going deep into a category—offering multiple large-cap core funds—often does little to improve a participant’s retirement outcomes. Download the full paper below to read the full research behind these tips.