7 Principles of Investment Menu Design for Retirement Benefits

Investment menu design, alongside the actual investments, is an important component of managing a Defined Contribution (DC) program. However, many sponsors spend significant time reviewing detailed performance statistics on plan investments while devoting less time to helping participant’s reach their retirement goals. Here are seven principles to consider when developing a plan menu to help optimize participant outcomes as well as investment performance in your retirement benefits:


1) Cover the Basics

Consider offering the core building blocks that should be in each plan. We define these as the following five asset classes: cash (e.g., stable value or money market), bonds, domestic large cap equity, domestic small-cap equity, and international. Having single options that represent each asset class is an important step to avoiding unnecessary complexity and overlap.


2) Go Beyond the Basics

Offering broad, diversified exposure to non-core asset classes such as TIPS, commodities, real estate, and emerging markets, in a bundled and simple fashion in your retirement benefits can also benefit participants.


3) Balance Design

Many menus today have equity-focused investment menus with more than 10 equity options, but few income options. This overweight to equities may send signals to the participant that equities are more important than fixed income even though portfolios benefit greatly in having a balance of both.


4) Rethink the Morningstar Style Box

The style box can provide a reasonable starting point when contrasting the different market exposures for investments, but most participants have trouble distinguishing the differences between growth and value. Therefore, it isn’t a requirement to fill each “box” of the style box. Rather, it may be best to assemble a lineup of investments that enables participants to create a diversified portfolio.


5) Minimize or Eliminate Employer Stock

There are many reasons why this makes sense. You can find Morningstar Investment Management LLC’s research and perspective in this white paper on employee stock ownership.


6) Look at Target-Date Funds

Target-date funds have exploded in popularity following passage of the Pension Protection Act of 2006. Not surprisingly, target-date funds now receive the majority of flows for DC plans using them as the default option, and will likely continue to receive significant attention in the process.


7) Consider Advice and Managed Accounts

Offering an advice and managed account service as a component of your retirement benefits can not only help participants determine an appropriate allocation among the plan’s investments, but it can also help them set an optimal savings rate and a goal for retirement income.


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David is currently the head of retirement research for Morningstar Investment Management LLC.  In this role, he works to enhance the group’s consulting and investment services and serves as the chair of the Advice Methodologies and Automated Strategies subcommittee, which is the working group responsible for developing and maintaining all methodologies relating to wealth forecasting, general financial planning, automated investment selection, and portfolio assignment for Morningstar Investment Management LLC. He does research primarily in the areas of financial planning, tax planning, annuities, and retirement. His research has been published in a variety of industry and academic journals and has received a number of awards. He is a frequent speaker at industry conferences and is regularly quoted in the national media.  When David isn’t working, he’s probably either out for a jog or playing with his two kids.

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