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. The report includes data from approximately 1,700 qualified plans, 1,400 clients and nearly 5 million participants for which Vanguard directly provides recordkeeping services. Here are some key findings from the study.
Investment Menu Size
According to the 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 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 is the most common participant holding (87%), followed by a diversified domestic equity fund (30%). Only 1 in 5 plans offers a self-directed brokerage option. Of those plans, only 1% of participants use it, representing 2% of plan assets.
Alternative Investments
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.
Vanguard’s How America Saves 2023 report includes comprehensive data on all aspects of retirement plan design, features and usage. 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.
Connect with a specialist to learn more about how CBIZ can help you keep your investment menu competitive and relevant.
Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.
The information and statistics included in this article were extracted from the 1st Quarter 2024 Plan Sponsor Outlook newsletter by Kmotion, Inc.