Mark Anderson is in the middle of overhauling his company’s 401(k) plan. Anderson is the finance chief of Granite City Electric Supply Co., a Quincy, Massachusetts-based distributor with about 180 employees. The project began because he and the company’s investment committee wanted better service from Granite City’s 401(k) provider. But as they started reviewing the plan, Anderson realized there was another reason to change. “We offer something like 25 or 35 funds,” he says. “It’s excessive. People get overwhelmed.”
Gone are the days when designing a 401(k) plan meant little more than offering every kind of fund under the sun and letting employees choose among them. Today, companies realize that the investment behavior of many 401(k) participants ranges from the discouraging to the downright frightening. Moreover, research has shown that offering a slew of options can actually stymie employee choice and hinder plan participation.
As a result, more and more companies are taking their plans back to the drawing board. The task is becoming increasingly urgent, as the oldest members of the baby-boom generation approach retirement armed mostly with 401(k) savings. Companies like Granite City are redesigning their plans with an eye to providing a more manageable and appropriate menu of investment options. They are striving to make their plans as balanced as possible, adding healthy new choices such as lifecycle funds and collective trusts. And they are monitoring their plans to make sure that funds don’t drift from their stated goals.
There is also another reason for CFOs to revisit the mix of fund choices and structure of their 401(k) offerings: the Department of Labor has just released its final ruling on the types of investments deemed appropriate for automatic enrollment. Money-market and other stable-value funds, which many companies offer as a default option for employees, didn’t make the cut. The three types that did: lifecycle funds, balanced funds, and professionally managed accounts. (The DoL approved capital-preservation products as qualified default options for only the first 120 days of plan participation.)
Given the DoL’s blessing, lifecycle funds should become markedly more popular. Also called target-maturity or target-date funds, lifecycle funds first appeared in 1995 but have just begun to catch on in the last five years. Still, just 33 percent of employers currently offer them in their 401(k) plans, according to the Profit Sharing/401(k) Council of America.
Like balanced funds, lifecycle funds comprise a balance of stocks and bonds. Unlike balanced funds, they are managed to automatically shift their investment mix to an appropriate level of risk as the employee ages. Their names — such as “Vanguard Target Retirement 2020 Fund” or “Putnam Retire Ready 2045″ — usually feature retirement dates, making it easy for employees to choose the right fund. While some criticize the funds as too conservative or not diversified enough, they should provide better growth over the long term than stable-value vehicles.
“If you are on the hook as the fiduciary, you’re thinking, ‘Let’s get folks into an investment structure that is appropriate for their age and their time horizon,’” says Sue Walton, senior investment consultant at Watson Wyatt Worldwide. “[Lifecycle] funds are appropriate and consistent.” Forty-five percent of employees invest in lifecycle funds when they’re available, according to data from Hewitt Associates.