Morningstar® on building better investment menus

A good retirement plan lineup has the potential to positively shape participant investment decision-making. In an interview, Morningstar’s Jeremy Stempien shared other thoughts on investment lineups, the need for the basics, and participant financial literacy.

Drafting the investment blueprint

For plan sponsors, the fiduciary responsibility for building investment lineups means more than just selecting funds, according to Morningstar. In a recent presentation, Mr. Stempien told an audience of nearly 40 Lincoln Financial plan sponsors that fiduciaries should think of themselves as “choice architects” when building thier plans' investment programs.

Read Mr. Stempien's thoughts on the following:

During your presentation, you stated that fiduciaries need to view themselves as “choice architects.” Tell us more about that concept.

Stempien: Like it or not, plan sponsors and their fiduciaries play a pivotal role in shaping participants’ investment behavior. Every decision made for a plan’s investment lineup has intended or unintended impacts on the way participants choose investments. Let’s look at an example.

Eight years ago, many plan sponsors gave participants free rein on investment choice by offering extensive investment lineups. In that situation, participants struggled to make wise choices. They often didn’t know which asset classes to choose, made big bets on certain asset classes, or didn’t make any choices at all.

That experience and many others taught us that we need to think more about the choices at participants’ disposal. Plan sponsors and consultants need to understand what makes sense for their participant population, particularly the number of choices. Even the way we present an investment lineup on an enrollment form can affect how participants decide. If the plan offers target-date funds as a default investment option or among the choices offered in the plan, list them at the top of the page. Fiduciaries can make it easier for participants to head down the right path. At the same time, plan sponsors and consultants need to compare the need for a robust lineup versus overwhelming participants with unnecessary complexity. Ultimately, it comes down to a question of financial literacy.

How do you gauge participants’ financial literacy? When should plans consider expanding the investment lineup?

Stempien: Unfortunately, there is no rule of thumb for financial literacy. In general, it helps to begin with an assessment of the participant population and their current investment behavior based on demographic data. Some questions to consider include:

  • Is the plan well-diversified across asset classes?
  • What’s the average number of investments per participant? How does that compare with a benchmark of similarly sized plans or within a similar industry?
  • Are participants invested wisely by age group and estimated time until retirement?
  • Are you finding younger participants invested too conservatively? Are those nearing retirement over-allocated to equities?

While this assessment offers valuable insight, other factors, like an organization’s industry or business, may also influence financial literacy to some extent. Participants in financial services organizations may find it easier to handle these choices because they feel familiar with investments, but it’s important not to make assumptions. You may find participants making better investment decisions in other organizations.

Expanding the plan’s fund lineup really comes down to balancing the need for coverage across asset classes and investment styles while managing the risk of choice overload and naïve allocations.

Many plans offer a heavy equity allocation with few fixed income options. Should plans offer more fixed income options and, if so, how many?

Stempien: An overweighting to equity options sends a message to participants that equities are more important than fixed income. But fixed income inherently plays an important role in investment lineups, particularly for those participants thinking about a distribution strategy. Having more equal footing between equities and fixed income signals the relative importance of fixed income investing in the plan.


With the rise of target-date funds, do you see core fund lineups going away?

Stempien: Higher adoption of target-date funds seems to point to an overall decline in usage of core funds. It’s possible that core funds may start disappearing from investment menus. On the other hand, I could see the argument for offering more choice in the investment menu for that small population of participants who wish to maintain autonomy over their investments, as opposed to a target-date option.

How should plan sponsors evaluate and monitor their funds?

Stempien: When selecting and retaining funds, plan sponsors have a fiduciary obligation to follow the prudent man rule, and not necessarily to provide the best performing fund. They need to work closely with their consultants or advisors, who will evaluate the fund from a quantitative standpoint (e.g., performance consistency, style consistency, manager tenure and expenses) and also from a fundamental standpoint. It’s important to ensure that the investment process is repeatable and that the management team has a demonstrated track record of skills and capability, among the many qualitative factors to consider. When it comes to ongoing monitoring, this same criteria should be used to show a track record for continuing to meet the criteria used to make the initial selection for the plan.

As part of ongoing monitoring, it may be wise to consider maintaining a log of funds not selected during manager searches. Tracking the results for the path not taken can help evaluate the quality of the decision-making regarding the plan investment options as a learning opportunity for the plan sponsor and consultant alike.


The views expressed are those of Jerry Stempien of Morningstar, are subject to change and may differ from those of the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. All data referenced are from sources believed to be reliable but cannot be guaranteed.  Lincoln National Corporation is not affiliated with Morningstar.