Keeping Your Investment Menu Competitive and Relevant
As a plan sponsor, it’s prudent to compare how your investment menu looks compared to peers. If you’re using your retirement plan as a recruitment and retention tool, you want to make sure you are competitive with what you are offering to employees. And from a fiduciary standpoint, it’s important to be in line with industry standards. It’s also important to remember that there is not a one-size-fits-all investment lineup. As a fiduciary, you are responsible for offering a lineup that is appropriate for your participants.
Vanguard's How America Saves 2023 report provides a comprehensive snapshot of plan investment menu offerings, participant usage and emerging trends across the country. Consider using this report as part of your ongoing investment review meetings with your advisor to help ensure that your offering remains competitive and meets the needs of your employees. Next are some key findings from the 2023 study.
Investment Menu Size
According to Vanguard’s report, if you count target date and target risk funds as a single offering, the median investment menu contains 16 options (the number jumps to 27.2 if you count each target fund offered separately). Only 8% of plans offered more than 25 distinct investment options, whereas 9% of plans offered 10 or fewer.
The number of funds used by participants in retirement plans has declined over the past decade, likely due to the creation of target date and target risk funds. The average number of funds used by participants is currently 2.4. The survey advises the importance of finding the right balance of fund options — enough so that your employees can be adequately diversified, but not so many as to cause choice overload and confusion as they go through the selection process.
Types of Options Offered
Nearly all Vanguard defined contribution plans offered an array of investment options covering four major investment categories: equities, bonds, balanced funds (including target-date and target-risk strategies) and money market or stable value options. Diversified equity funds continued to be the most popular type of fund offered. Ninety-six percent of plans now offer target-date or target-risk funds.
Types of Options Used
A balanced fund (including target-date and other balanced funds) is the most common participant holding (87% of all participants), followed by a diversified domestic equity fund (30% of all participants). Only 1 in 5 plans offer a self-directed brokerage option. Of those plans, only 1% of participants use it, representing 2% of plan assets.
Alternative investments have very low usage in Vanguard’s retirement plans. Alternative investments include things such as private equity, hedge funds, real estate, commodities and energy. In general, plan sponsors have been hesitant to offer alternatives due to the lack of participation, operational challenges and associated costs (particularly potential litigation risk and cost).
Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. Investment Advice and 3(38) Investment Fiduciary services offered through Diversified Financial Advisors, LLC, a Registered Investment Advisor. 3(16) Administrative Fiduciary Services provided by PISTL Service Corporation. Discretionary Trustee services provided by Printing Industries 401k Trustees. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
GRP-317-1123 (Exp. 11/24)