Enhancing Core Menus to Help Get 401(k)s in Better Shape For RetirementEnhancingCoreMenustoHelpGet401(k)sinBetterShapeForRetirement

The role of the core menu in defined contribution (DC) plans has changed considerably over the last decade as default investments, in particular target-date funds, continue to capture plan sponsor attention and participant assets. For example, today target date funds have roughly $3 trillion in assets, up from roughly $1 trillion in assets in 2014 and from less than $200 billion in 2008 (Morningstar 2023). This evolution requires plan sponsors and consultants to revisit key assumptions about optimal core menu design, especially as plan sponsors increasingly seek to retain participant assets during retirement, since older participants are more likely to use the core menu and invest conservatively. For readers not familiar with core menus, they are a menu of investments, such as mutual funds, determined by the DC plan sponsor that a participant can allocate their balance among.

This paper uses data from 8,271 401(k) plans to explore where asset class coverage gaps exist in core menus and quantifies the portfolio implications associated with the gaps. Equity funds clearly dominate core menus today, with roughly three times as many equity funds on core menus versus bonds funds, on average, which can make it difficult to build efficient conservative (i.e., retirement) portfolios and may lead to excess risk-taking among participants (i.e., if the participant follows a naïve allocation strategy or chases returns).