401(k) Core Menus Are Not Retirement Ready

The portfolio efficiency costs of these coverage gaps can be staggering, exceeding roughly 100 basis points on an alpha-equivalent basis.

The most notable gaps in asset class coverage include inflation-linked bonds, high-yield bonds, commodities and real estate, although adding other asset classes, such as long-term bonds, may be worth considering.

While some plan sponsors may be hesitant to expand core menus given past research on the topic (e.g. research noting negative relationship between core menu size and plan participation), it’s important to place past research in the correct context: It largely took place before the broad adoption of automatic enrollment and prepackaged asset allocation solutions, such as target-date funds, and may not be relevant today.

Core menus don’t necessarily need to be bigger, they just need to be smarter. By consolidating a few of the riskier (equity) options to make room for retirement-focused strategies, it is possible to both improve the core menu and reduce the total number of funds offered.

For example, instead of having a fund covering each of the nine common U.S. “style box” equity asset classes (which are highly correlated), consider combining (or eliminating) a few of these equity options and adding some key diversifiers such as real estate or an inflation-protected bond fund.

Creating a truly optimal DC core menu requires a certain degree of art and science that will vary by plan.

This new research suggests, though, that most core menus today should be revisited before they can truly be considered optimal for the participants who are most likely to use them.

David Blanchett is managing director and head of retirement research, PGIM DC Solutions. His commentary represents his own views and opinions regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced above and are not necessarily the views of PGIM DC Solutions.