Fund Lineup Sizing
Section 404(c) of the Employee Retirement Income Security Act (ERISA) protects plan sponsors from employees’ poor investment choices. It requires that a defined contribution (DC) plan offer a minimum of three investments that are diversified, have risk and return characteristics different from each other, and, when combined, provide diversification for a participant’s overall portfolio.
Few, if any, plan sponsors offer just three investment options. Instead, sponsors and retirement plan advisers continually question the number of options in their DC plans. Behavioral finance makes the case for decreasing the menu because studies show people are often confused by choice, selecting limited options instead of an array.
Looking at recent years’ PLANADVISER Retirement Plan Adviser (RPA) Survey responses, menu options increased by an average of 20% in 2015 through 2018—a period when more than 60% of advisers reported that “many/most” of their clients were increasing the size of their fund lineups.
From a different perspective, PLANSPONSOR Defined Contribution Survey data indicate that plan sponsors varied their menu option count from 2011 through 2014. On average, the number of funds in a plan was 17.6 through 20.6 and then increased in 2015 through 2018, ending the cycle at 24.9 options. The average number of funds decreased by 3.1 to 21.8 since last year, similar to the 2018 through 2019 findings in the RPA Survey.
However, a recent study by David Blanchett at Morningstar found benefits to having a larger core menu. Increasing core menu size resulted in greater adoption of the plan default investment: from approximately 74% for plans with 10 funds in the core menu to approximately 87% for plans with 30. It also found that larger fund lineups led active participants to build more efficient portfolios.
Defined Contribution Investment Option Lineup Changes
Increased for many/most of my DC clients
Stayed the same for many/most of my DC clients
Decreased for many/most of my DC clients