The 401(k) lineup: successful planning with a focused lineup

According to the PSCA's 53rd Annual Survey of Profit Sharing and 401(k) Plans, the average number of investment options available for participant contributions in all plans in the survey has grown from 10 in 1998 to 18 in 2009. What is clear is that lineup expansion has grown much faster than participant utilization. Large investment menus can have detrimental effects on participants. Given the disparity in financial literacy and engagement of participants, there is a better approach to constructing an investment lineup. At a high level, it is important to recognize that there are different participant types, each with its own needs and preferences. For this reason, an investment lineup should be divided into three tiers: 1. a full suite of target date options, 2. a small set of passively managed or index funds, and 3. an array of actively managed funds. A structured three-tiered approach to retirement plan options provides participants a focused lineup.