Core menu consolidation is a defined-contribution plan trend that’s been building over the past few years with a reasonable premise: Investors who choose investments on their own tend to be overwhelmed by the number of retirement plan investment options and often do nothing. Another argument is that fewer investors are investing on their own using a plan’s core investment funds. Instead, many investors are using their plan’s default investment, often a target-date fund or managed account.
So, the question is: With 80% of assets sitting in the plan’s default, why should plan sponsors care about the retirement plan investment options in their core menu? Let’s look at a couple reasons.
3 reasons retirement plan investment options are more important than ever:
- Core menus are typically used by 20% - 30% of a plan’s participant base. These are participants who choose to not use the plan’s default investment and instead invest on their own. It’s not unusual for an even larger number of participants to hold one or two funds in addition to the plan's qualified default investment alternative, or QDIA.
- Plan design has evolved. Choice overload prevented inaction when investors made all their investment selections themselves. Today, plan design can help participants with some choices. For instance, with auto-enrollment features, employees are automatically enrolled into certain retirement savings vehicles. Plan sponsors can use auto-asset allocation vehicles to help ensure their participants are placed in a diversified investment account. And some plans seek to help their participants save more with features that automatically increase savings rates. Still, some savvier investors want choices. Our research has shown that the investor who is using the core menu is older, earns more, saves more, has a larger balance, and has more tenure than a defaulted investor.
- The core menu can be the building block for more customized defaults. These defaults, such as custom target-date funds or managed accounts, are more popular than ever. That’s because many participants have demanded more customization, and plan sponsors have realized these retirement solutions can better match their employees’ needs. But without a robust investment menu, the custom target-date fund or managed account service can lack exposure to asset classes that can provide increased diversification and may even help long-term performance.
In our opinion, the trend toward consolidation of core menus is not helping investors improve their retirement outcomes. If plan sponsors wanted to reduce the number of offerings on their core menus, I’d encourage them to decrease the breadth, not depth. Consider looking for funds that cover the same asset classes or sectors of the market and potentially reduce those—don’t reduce the number of retirement plan investment options overall.
Dan Bruns is a product and investment specialist for the Morningstar Retirement Solutions product group.
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