Houston, We Have a Solution: Effective Investment Menu Design

Ultimately, the value a retirement plan advisor brings to plan clients can be measured by how successful the mission is, which in retirement plan terms is measured in plan outcomes and participant readiness for retirement.

Offering meaningful processes for investment selection and monitoring, benchmarking vendor services and fees, and supporting plan fiduciaries are now standard operating procedure. Instead, the most successful advisors going forward will deliver these core services, however will also have a strong focus on impacting bottom-line participant outcomes by consulting with sponsor clients not only on plan design, but also investment design.

Why Should Plan Sponsors Support a Mission of Investment Design?

Investments fall into the plan’s strategy when optimizing the retirement plan, and a carefully constructed investment menu can help participants maximize their retirement income potential. Unlike some auto features that can potentially increase costs for the plan sponsor, investment design benefits participants with little or no incremental expense by the participants or the plan sponsor.

Mission Checklist: Behavioral Economics Create a Blueprint for Effective Investment Design

Behavioral economics point the way to successful investment design. Much has been written about the topic of participant behaviors, but one behavior in particular—choice overload—is important to understanding effective investment design. Shlomo Benartzi (2012) notes this phenomenon in his book Save More Tomorrow, “…there is a growing body of research in psychology and economics (from laboratory experiments and real-world observations) indicating that there is such a thing as too much choice. Specifically, people find it easier to make decisions when faced with a small menu of options than with many possible choices.”

A crowded plan menu can negatively impact how participants allocate their retirement savings across investment options. In other words, effective “retirement plan investment design” should consist of a carefully constructed investment menu which can help participants maximize their retirement income potential, rather than a typical “every-stylebox-is-covered” approach (which can lead to participant choice overload).

Countdown to a Successful Launch Toward Participants’ Retirement Goals

Jeff Elvander, Chief Investment Officer for RPAG, in his article Mission of Retirement Plan Investment Design: ‘One Small Step’ for the Plan Sponsor, ‘One Giant Leap’ for Plan Participants, suggests the “5…4…3…2…1…liftoff!” approach to investment portfolio design, constructing the plan’s investment lineup so that participants can effectively “launch” toward their retirement goals while maximizing their retirement income potential. This investment design approach is as simple as it sounds: 5 target date funds (TDFs) by vintage per glidepath, 4 U.S. equity funds, 3 index funds, 2 fixed income funds, and 1 international fund. Fewer options means employing broader investment mandates, which reduce choice overload and help better identify skillful active managers, directly affecting participant ending account balances—a successful “landing” at retirement.

Although this may be an extreme or perhaps too restrictive an example of plan investment design, the retirement plan industry continues to see trends shifting toward narrower investment menus, and for good reason. As a plan’s investment menu lineup is a fiduciary decision, diligent care should be taken to ensure participants are not overloaded with choices, sometimes leading them to make poor ones by default. When building or reviewing a plan menu, consider this simple approach to streamlining plan design, which should still offer participants everything they need to launch a robust portfolio.

Securities and investment advisory services are offered solely through registered representatives and investment advisor representatives of Ameritas Investment Corp. (AIC), a registered Broker/Dealer, Member FINRA/SIPC and a registered investment advisor. AIC is not affiliated with Summit Group of Virginia LLP. Additional products and services may be available through Summit Group of Virginia LLP that are not offered through AIC. Representatives of AIC do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation.

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