PGIM: Core Menu Should Reflect Investment Needs of Older Participants

As plan sponsors increasingly seek to keep participants in-plan during retirement, a new report from PGIM suggests that plan sponsors and consultants need to revisit core investment menus and offer more asset classes that will benefit older, more conservative investors. 

According to PGIM, equity funds “dominate” core menus today, with roughly three times as many equity funds as bond funds on core menus.  

The paper suggested that the benefits of including more conservative asset classes include higher risk-adjusted returns that could result in four more years of retirement income for participants investing in the core menu.  

David Blanchett, the author of the report and head of retirement research at PGIM DC solutions, wrote that the most notable gaps in asset class availability today include inflation-linked bonds, commodities and real estate. He argued that long-term bonds and high-yield bonds deserve wider consideration as well. 

Improving the core menu does not necessarily mean adding more options, Blanchett said, but designing it more strategically by consolidating the existing riskier options to make room for more conservative asset classes that are currently missing.  

David Stinnett, a principal of strategic retirement consulting at Vanguard, says it is important not to overwhelm participants with too many menu options because, “by definition, they are not professional investors.” 

“This is not something they do as part of their daily job, and so on those occasions when they [need] to make decisions, and these decisions often have a very big impact on their long-term retirement outcomes, you want to structure things in such a way that won’t overwhelm, intimidate or confuse,” Stinnett says. 

According to Vanguard’s most recent “How America Saves” research study, the average number of funds a sponsor offers in its lineup is 17.4, assuming that a target-date-fund series counts as one investment. Stinnett says the average number of funds a participant uses is a mere 2.4.  

“Participants are generally not taking a peanut butter approach and spreading out amongst all the funds, which of course wouldn’t be a very sensible thing to do, and they are kind of picking and choosing, which is good,” Stinnett says. 

The PLANSPONSOR 2023 DC Plan Benchmarking Survey found even higher average sizes for investment lineups, with DC plans offering an average of 26 investment options and participants holding an average of 5.3 investment options in their accounts.  

Older Participants More Reliant on Core Menu Funds 

Because of the rise in plan features like automatic enrollment and the rise of default investments, particularly in target-date funds, PGIM argued in its paper that core menus have taken on more of a supporting role in DC plans. As a result, fewer participants are using the core menu and, in turn, fewer are directly driving their allocation decisions.  

PGIM also found that older participants tend to be more likely to take advantage of the core menu. For example, data from Vanguard show that while roughly 80% of participants in 2022 were using target-date funds, they only represented approximately 40% of assets. This is likely because participants who have higher balances—those who tend to be older and have higher incomes—are less likely to use a professionally managed portfolio option in DC plans.  

The PGIM paper suggested that because older participants are more likely to use the core menu, it is important for them to have access to less aggressive asset classes; this is less significant for younger participants, who tend to use the default investments.  

According to data from Morningstar, domestic large-cap equities are included the most in retirement plan investment menus, followed by foreign large-cap, while domestic mid-cap and domestic small-cap are roughly tied. However, there is relatively little coverage of the more alternative-type asset classes, such as commodities and real estate (both domestic and global). 

Generally, the fund counts suggest that participants building more aggressive portfolios are going to have more options available than those building more conservative portfolios, according to PGIM. 

Making Changes to the Menu 

When evaluating an investment menu, Stinnett says plan sponsors need to follow certain criteria before they decide on adding or removing any funds from the plan.  

“Usually that criteria revolves around cost and performance,” Stinnett says. “You want relatively low-cost funds that perform competitively over the long term, but you want to have a standard that you use to assess those funds, both from a cost and a performance standpoint.” 

He says while it is important for plan sponsors to look at the utilization of the funds, this should not necessarily be a deciding factor of whether or not to keep a fund on the menu, as a lack of utilization may be due to poor communication about the existence or benefits of a certain fund.  

Stinnett also echoes the arguments made in PGIM’s report, saying that from a demographic perspective, as there is an aging workforce and a growing number of participants are staying in plan after they retire, plan sponsors should start to think about adding more fixed-income investments to the menu to support more conservative investors.  

“The investment lineup is so fundamental to the whole reason for having a 401(k) plan,” Stinnett says. “Once you’ve made the decision to save, you have decades to invest and hopefully for that to grow and compound over time. So the responsibility of a plan sponsor to select the right funds out of the thousands that are available, [as well as] the right coverage, [means that] structuring them the right way [and] providing prudent oversight over time is so important.”