401k investment fund lineup

Does your 401k plan offer a competitive 401k investment fund lineup? Has your investment advisor kept up with leading edge ideas about investment option offerings?

Based upon more than 30 years of experience working with employer retirement plan sponsors, here are my thoughts on what should be included in your 401k investment fund lineup.

Important 401k Investment Fund Lineup Elements

1. Options for different investor types

You have a number of different types of investors that participate in your 401k plan.

The majority of your plan participants (75% or more) are likely to be most comfortable investing in your target date funds. They are your set-it-and-forget-it group who want to spend as little time as possible with their retirement plan.

However, you also will have a number of employees who only want to invest in index funds. Another group will want to use your core funds (all of the non-target date funds) to properly diversify their account balance based upon their age and ability to bear risk. Finally, your executive or senior management group will be most interested in using your plan to complement their other investments.

Make sure your communication materials and employee education sessions highlight the funds available to each of these investor types.

2. Diverse asset classes

Nearly every 401k investment fund lineup has a hole or two in it.

Almost all 401k plans do a good job of covering the nine basic U.S. equity style boxes (value, blend and growth) in the standard capitalization sizes (large, mid and small).

However, does your plan offer an international bond fund? How about a real estate or commodities fund? In many plans, the real estate fund has been the best performing option recently and may be again this year.

As the current economic cycle progresses, possibly into recession, and the bull market in U.S. equities comes to an end, do you have the right investment options available to allow your participants to continue to be successful investors?

3. A high quality safe option

Your 401k investment fund lineup should offer a high quality, extremely low risk option for those participants who are close to retirement, scared of volatile markets or conservative investors.

Stable value funds have been the highest yielding, lowest risk options available lately. If the Fed continues to cut interest rates, they will likely prove to be superior in comparison with money market funds.

Be aware that employers have faced litigation for offering money market funds instead of stable value funds. Many advisors feel that the safe option is the most important investment option in 401k plans. Make sure your plan offers the best safe option possible.

4. Enough fixed income choices

Many plan participants I talk with who experienced the market crash of 2008-09 tell me they will never commit a high percentage of their account balance to stocks again. A lot of 401k plan participants experienced paper losses in excess of 50%.

As a result of the crash, your 401k investment fund lineup needs to feature more fixed income choices. Pre-crash, most plans offered only the basic three fixed income options: a money market/stable value fund, intermediate-term bond fund and high yield bond fund.

Now, most advisors recommend one or more of the following in addition to the basic three: an international bond fund, unconstrained bond fund, corporate bond fund, income fund, short duration bond fund, government securities (GNMA) bond fund, multi-strategy bond fund, total return fund and/or multiple options of each fund type.

It has become common to have at least five different fixed income options (including the basic three).

5. A generous number of index funds

You can find an index fund option for nearly every major asset class. And, of course, if you want your 401k investment fund lineup to be comprised of index funds only, you can go to Vanguard and make that happen.

But if you want to have a nice mix of active and passive options for your employees to choose from, how many index options is the right number to offer? No fewer than five, I believe. You should offer at least fixed income, large cap equity, mid cap equity, small cap equity and international equity index options.

6. High quality target date funds

There really are only five target date fund families that warrant your consideration. They have stood the test of time in terms of performance and collectively have nearly 80% of all target date assets, according to Morningstar’s 2019 Target-Date Fund Landscape report.

If you use a target date series from any other fund family outside of the top five, you should consider making a change. These other target date series tend to be higher cost and have a greater risk of closure since they have attracted comparatively few assets.

7. The right number of options

Many studies have concluded that offering too many investment options confuses plan participants, resulting in a lower employee perception of the value of their plans.

Research indicates that the optimal number of investment options in a 401k investment fund lineup is between 12 and 20. Assuming that you will offer a target date series (nine funds), I suggest that you aim for a total closer to 20.

8. Cost effective choices

You don’t need to offer the lowest cost fund option in each asset class. If you believe a higher cost investment option might yield greater returns, you are free to offer that option.

However, cost needs to be a major consideration, along with performance and risk, with the funds you offer in your 401k investment fund lineup.

Be careful. There has been significant and frequent litigation against employers using high cost investment options when better performing, lower cost options are available. Also, make sure you always select the lowest cost share class of each mutual fund in your 401k investment fund lineup.

Review and analyze your 401k investment fund lineup at least once a year. This is a very dynamic area and major changes happen frequently.


About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.