Investment Menu:  Best Practices

Due to regulatory changes, market instability and large numbers of investment options, plan sponsors have been devoting more attention to their plans’ investment menus.

A recent commentary from Vanguard identifies five best practices to assist plan sponsors in evaluating their menus while effectively communicating their plans to participants. To develop a sensible investment option menu and the necessary ongoing oversight, Vanguard suggests the following:

  1. Focus on the fundamentals of asset allocation, diversification and low costs. These are proven strategies for long-term investment success and should be the foundation of an effective investment menu. Diversification neither assures a profit nor guarantees against loss in a declining market.
  2. Offer professionally managed solutions such as target date funds and managed accounts. Target date funds, traditional balanced funds and managed accounts have helped participants construct well-diversified portfolios. They allow participants to take advantage of the principles of asset allocation, diversification and low costs in a single investment choice.
  3. Make available a core set of broad-market index funds. Broad-market index funds cover the major asset classes, and have the potential to enhance retirement savers’ wealth accumulation as a result of four characteristics: limited portfolio turnover, visibility of portfolio content and performance through benchmarks, diversification, and low management expenses and day-to-day costs.
  4. Make the investment menu more participant-focused. One way to make the lineup more participant-friendly is to prevent choice overload. While the average number of options has risen in recent years, participants continue to invest in an average of only three. Offering more choices won’t likely result in better decision-making or asset allocation by participants.

Another is to use a tiered menu, in which the investment options are presented within logical groups, such as active equity or international, as opposed to simply a long list arranged alphabetically.

  1. Pursue active, continuous oversight. Due diligence includes setting clear objectives for the plan’s investment menu, and documenting the investment choice selection and evaluation criteria. Overall, of course, there should be a detailed investment policy statement, which is reviewed on a regular basis.

Vanguard’s commentary, “Constructing a defined contribution investment lineup: Vanguard’s five best practices,” is at

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© 2013 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance, nor as the sole authority on any regulation, law, or ruling as it applies to a specific plan or situation. Plan sponsors should always consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.

For plan sponsor use only – not for use with participants or general public.

This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax for guidance on your specific situation.

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