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Do 401(k)s Need Simpler Menus?


When I am in department stores, I quickly become overwhelmed by the seemingly endless number of choices. Invariably, I retreat to a smaller store where someone has the good sense to limit the number of items I can pick from. A growing body of research suggests that 401(k) investors react much the same way when shopping for investments.

According to a recent report by 401(k) administrator Diversified Retirement Corp., once a plan offers more than 14 investment options, participation rates fall–“perhaps because participants begin to feel overwhelmed with investment decisions.”

Diversified puts the optimal number of investment options at 10 to 14—a range that correlates with the highest 401(k) participation rates.

Last week, JP Morgan Asset Management unveiled a more radical proposal. At a news conference, the company—which serves as a 401(k) administrator—launched a new offering that would allow 401(k) plan sponsors to streamline investment menus to the point where they include just four mutual funds: A target-date fund series, a diversified equity fund, a diversified bond fund, and a diversified cash fund.

“It can be powerful to limit choice,” says Anne Lester, a managing director and senior portfolio manager at JP Morgan Asset Management. “It frees you up to focus on asset allocation and rebalancing decisions.”

While it may sound anti-consumer, it’s actually part of a powerful trend, whereby 401(k) plans are implementing changes designed to take the decision-making out of employees’ hands. The goal: To inject some of the professional management of the old-fashioned defined benefit pension plan into the defined contribution system.

The three funds would be modeled after investments in pension plans. The equity fund, for example, would contain all the usual suspects—including large-cap U.S. stocks, mid-cap U.S. stocks, and small-cap U.S. stocks. But it would also hold international equities and shares in Real Estate Investment Trusts. The bond fund would contain U.S. bonds, emerging markets bonds, mortgage backed securities, high yield bonds, and bank loans.

Isn’t some of this risky stuff? Well, yes. But according to the funds’ architects at JP Morgan—who cite Modern Portfolio Theory—small doses of risky assets blended into a larger portfolio can actually reduce risk.

“If a high yield bond fund was offered as a standalone investment option, it could be abused” by 401(k) investors, who might plow most or all of their money into it in the hope of earning outsized returns, says Michael Falcon, head of retirement at JP Morgan Asset Management in the U.S. and Canada. In contrast, “as part of a diversified portfolio, a high yield bond fund can add value.”

JPMorgan says it is in talks with about a dozen 401(k) plan sponsors about replacing their investment lineups with the new streamlined offerings.


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    • 4 isn’t enough. I would rather have too many. Education is the key. An employee not in the 401K should be enrolled in a target fund based on age. They can go change it later when they care.

    • Penalizing the planners: Who do you propose pays to educate the millions of workers? Do most workers want to make the immense amount of effort to become as competent as institutional portfolio managers? Is it cost effective for companies to provide the resources to those relative few who do?

      We already tried your model. The majority of workers did not want to pay for professional advice, they did not take the time to competently manage their retirement, and they have a very long history of irrational behavior that resulted in significantly underperforming simple indexes.

    • Offering only four funds to choose from may result in greater total contributions, but it penalizes those of us who are actively planning for retirement. Offering only four funds (actually three, because the target date fund is probably just a mix of the others) ignores active vs. passive management, growth vs. value and prevents those who have significant assets outside of their retirement plans from choosing specific investments to complement their total portfolios. Providing financial literacy education for one’s employees is a much better solution than limiting choices for everyone.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.