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Designing Retirement Benefits With Plan Participants in Mind

7 principles of investment menu design for plan sponsors

David Blanchett, Morningstar Investment Management LLC


Investment menu design, alongside the actual investments, is an important component of managing a defined-contribution program. However, many sponsors spend a significant amount of time reviewing detailed performance statistics on plan investments, while devoting less time to helping plan participants reach their retirement goals.

Here are principles to consider when developing a plan menu to help optimize plan participant outcomes in your retirement benefits.

7 principles of investment menu design

  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 help avoid unnecessary complexity and overlap.   
  2. Go beyond the basics. Offering broad, diversified exposure to non-core asset classes—such as Treasury Inflation-Protected Securities, commodities, real estate, and emerging markets—in a bundled and simple fashion can also benefit plan 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 plan participant that equities are more important than fixed income, even though portfolios can benefit by having an allocation to both.   
  4. Rethink the Morningstar Style BoxTM. 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. Check out 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 exploded in popularity following passage of the Pension Protection Act of 2006. Not surprisingly, target-date funds now receive the majority of flows for defined-contribution plans using them as the default option.
  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.

Please see below for important disclosure. 

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Important Disclosure

Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Opinions expressed are as of the date indicated; such opinions are subject to change without notice. Morningstar Investment Management and its affiliates shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Before making any investment decision, please consider consulting a financial or tax professional regarding your unique situation.

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