6 investment menu best practices for 401(k) and 403(b) plans

How does your investment fund line-up compare to the market? Do you have too many investment options or too few? Best practices with regard to investment menus include:

• Offering 12 to 15 core fund options, which do not include managed fund choices.

• A set of professionally managed investment options (e.g.; risk based portfolios, model portfolios, balanced funds or target date funds) with the most common offering being target-date funds.

• Commodities, real estate and multiple international fund choices that broaden the investment spectrum providing participants with diversification opportunities.

• At least 4 conservative fund choices typically including a stable value or money market fund, intermediate term bond fund, unconstrained bond fund and international bond fund.

• Mutual fund offerings that feature the lowest cost share class available which generally do not pay any soft dollar revenue to the recordkeeper or adviser.

• Sufficient index fund options to allow participants to index invest in U. S. bonds, U. S. stocks and international equities.

And you should also consider:

• CITs. If you are a large plan sponsor (with at least $50 million invested in target-date funds), consider offering collective investment trust target date funds. This approach can reduce participant costs by as much as 1/2% as compared to the lowest cost target date options.

• Passively managed TDFs. There are a number of target-date fund series that use index funds as their underlying investments. If your 401(k) plan is smaller and you can't use CITs as your target-date option, consider using one of these target-date series.

• Cost. Cost has become one of the most important factors in determining the investment options plan sponsors decide to offer. The average cost of a 401(k) fund line-up will vary based upon plan size. However, it is safe to say that for most plans average cost should be between 40 and 75 basis points.

• More is not better. There are many studies showing that the more options offered, the more confusion participants experience and the less they contribute and participate. Although the average number of investment options offered in 401(k) plans has risen to 15, according to Vanguard the average number of investment funds used by participants has remained consistent over time at 3.

How does your investment fund menu compare?

Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC (lawtonrpc.com) an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.