Narrowing In on the Right Approach

Menu Design Considerations in a DC Setting

August 30, 2016 | Retirement Plans


One of the primary objectives that plan sponsors are tasked with is designing/implementing an investment menu that affords participants the greatest opportunity to achieve their retirement goals. While this seems like a relatively straightforward task, there is no one-size-fits-all solution. Rather, a variety of approaches could potentially offer the greatest opportunity. This paper seeks to explore the various approaches to menu design and identify how plan demographics and participant behavior can aid in determining what may be most appropriate for a specific plan.

Evolution of Defined Contribution Investment Menus

Before we begin to discuss investment menu design, we must first look to the past to see how it has evolved over time. Since the introduction of 401(k) plans over 30 years ago, plan investment menus have seen numerous developments. In the infancy of 401(k) plans, investment menus typically contained just three investment options: a stock fund, a bond fund, and a cash equivalent fund. As different types of options emerged and technology developed, plan sponsors and participants became more engaged and advocated for more investments, resulting in an increase in the number of options offered on a menu.

Despite the demand for increased choice, plan sponsors came to realize that the vast majority of participants were relatively indifferent towards making decisions regarding their retirement accounts. Furthermore, cash equivalent options (i.e., stable value and money market) were the most prevalent options utilized because of their perceived safety, despite their limited return potential. From there, plan sponsors recognized the fact that participants who are left to make their own investment decisions often fall prey to common investment mistakes and exhibit damaging behaviors, signaling the need for a solution to help guide participants. The result was the inclusion of professionally managed multi-asset class options on investment menus, which brings us to their current structure. Today, investment menus are generally comprised of at least two tiers (e.g., a tier of single asset class options and a tier of multi-asset class options) to accommodate the basic needs of participants.

Types of Participants and Corresponding Investment Tiers

At a high level, participants can be categorized in two broad groups based on their levels of comfort, and just as importantly, their ability to make investment decisions. Depending on which group participants fall under, they are guided to the appropriate investment tier.

Group 1: Participants who feel comfortable/are capable of making the asset allocation decision for themselves now and in the future.

Single Asset Class Tier: single asset class options spanning the risk reward spectrum from conservative to aggressive. Participants choose the options to create their own asset allocation mix and continue to monitor that mix over time.

Group 2: Participants who do not feel comfortable and/or lack the time/expertise to make the asset allocation decision for themselves. Instead, they choose to delegate the decision to an investment professional.

Multi-Asset Class Tier: a professionally managed family of target date and/or risk-based options. The table below identifies the primary differences between target date and risk-based options for reference.

Investment Tier Table

Determining the Most Appropriate Mix

With each tier, plan sponsors must assess a variety of factors to determine what types of options and how many options should be offered to participants within the plan. Considerations first and foremost should include an assessment of overall investment sophistication among participants and robustness of plan education. To better understand levels of participant sophistication, plan sponsors can utilize recordkeeping data to help identify behaviors among their participant base. In general, high allocations to overly conservative options, small allocations to a wide number of investments, or heightened trading activity during periods of market distress potentially indicate that participants likely do not have a clear understanding of the roles various investment options play in their overall asset allocation. As such, they may benefit from a more simplified menu design.

Once plan sponsors have a sense of what their participant base is best equipped to handle, they can begin to look at other factors to determine which types of options to include on both the single and multiple asset class tier. These factors may include, but are not limited to, plan demographics and long-term market trends. For example, if a plan has an older demographic, they may wish to consider looking at more income-oriented strategies in light of participants’ objectives at the later stages of their careers. With respect to long-term market trends, it is important to consider the current environment. For example, take today’s fixed income environment. The continued low interest rate environment suggests lower returns and greater downside risk from fixed-income markets going forward. As such, plan sponsors may wish to consider offering a more robust and/or flexible set of fixed income options to help participants achieve their goals.

Single Asset Class Tier Mix

When constructing the single asset class tier, it is important to include enough options to allow for appropriate diversification, but not to include so many that participants are confused or feel inclined to move between them based on short-term performance. Essentially, plan sponsors are faced with the competing tasks of diversifying and simplifying the investment menu.

Based on plan sponsors’ assessment of their participant base, they may choose to take various approaches in their investment offerings. Chart 1 provides a sample of what the various menus may look like. Regardless of which approach is selected, the investment options should be clearly defined and easy for participants to understand. Additionally, managers should have the flexibility to navigate changing market conditions.

Chart 1 Single Asset Class Tier Design Approaches

Multi-Asset Class Tier Mix

With respect to the multi-asset class tier, plan sponsors must choose whether to offer a family of target date options and/or risk-based options. To determine which multi-asset class type is appropriate or if both are appropriate, plan sponsors should consider how their participants want to make the asset allocation decision, and perhaps more importantly, if they have the ability to transition into a different investment option as their personal circumstances change.

If plan sponsors determine that their participants want to become automatically more conservative over time and/or lack the ability to translate their personal situation to an appropriate investment objective, it may signal that offering a target date tier is the most prudent course of action. Alternatively, if participants want to retain the decision as to when to become more conservative and/or have the ability to assess their personal situations and translate them to the appropriate objective, it may signal the need to offer a risk-based tier. Should plan sponsors believe both types of participants exist in their plan, it may be appropriate to offer participants both target date and risk-based tiers and let them select which approach best fits their needs.

Please note that when deciding which type of multi-asset class option to use for participants who fail to make an investment election (i.e., the Qualified Default Investment Alternative, or QDIA), plan sponsors will need to look at factors beyond participant preferences. Specifically, plan sponsors may wish to consider age dispersion, outside assets, plan turnover, and other demographic factors. For a detailed discussion regarding the topic, please refer to “The QDIA Decision”, a white paper by Manning & Napier written in collaboration with Fred Reish & Bruce Ashton of Drinker Biddle & Reath LLP, as well as the Department of Labor’s February 2013 publication “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries.”

Implementing the Investment Tiers

More recently, another layer has been added to the menu design discussion, particularly in the larger plan market. Specifically, plan sponsors must decide if their plan’s needs warrant the use of custom options as opposed to off-the-shelf solutions. As always, the approaches carry varying fiduciary implications.

Off-the-shelf – pre-packaged mutual funds or collective investment trust funds provide plan sponsors with access to a wide variety of options for both their single asset class and multi-asset class investment menu offerings. Broadly speaking, off-the-shelf solutions offer cost advantages over their custom counterparts given the pooled nature of the assets and greater transparency. When using off-the-shelf solutions, plan sponsors should have a prudent and documented due diligence process in place to evaluate the options.

Custom – options from a variety of providers (i.e., open-architecture design) are used with the intent of creating a “best-in-class” structure or a seemingly simplified approach. Offerings may be unique to specific plans and/or advisors. With respect to the asset class tier of the menu, plan sponsors may elect to use a “de-branded” or “white-label” approach to potentially aid in diversifying participants’ investments, while also simplifying the menu. For example, participants could potentially see an option labeled U.S. Equity on their menu. While it would appear to be one choice for participants, the option could be comprised of multiple underlying mandates (e.g., a dividend-focused option, growth-oriented option, core-oriented, small cap options).

Additionally, advisors may select what they consider to be “best-of-breed” managers to provide participants with exposure to a wide range of asset classes and investment managers. If a target date option, the advisor may create a customized glide path designed to more closely align with the overall needs of the plan based on its demographics. While there are a variety of glide path approaches available in the off-the-shelf market today that will generally accommodate the needs of most plans, there may be instances where a presence of unique factors at the overall plan level suggests the need for a custom solution.

  1. Should plan sponsors choose to use a custom approach, considerations should include, but are not limited to:
  2. Who will accept fiduciary responsibility for selecting underlying investment options, creating the glide path (for a target date option), and managing the asset allocation?
  3. Will the asset allocation be managed in accordance with the prevailing market environment or will it be systematically rebalanced to pre-determined allocations?
  4. How will the options be monitored (i.e., what benchmarks/peers will be used to determine whether the approaches are being implemented effectively)?
  5. Will the custom option be evaluated holistically or by the sum of its parts (i.e., by each individual component)?

Considering Additional Types of Options

While we’ve discussed the two investment tiers that are most common in 401(k) plans, it is important to note that they are not the only choices available. In addition to the tiers previously described, there are several other specialized options that could be utilized in retirement plans. Each has its own unique characteristics that are generally more appropriate for plans with very specific demographics. In certain cases, however, they may solve a unique set of problems or help promote successful outcomes when such a unique set of conditions exists. They are typically helpful for particular groups of individuals with distinct savings behaviors.

Managed Accounts: a service where an investment professional creates an asset allocation that is tailored to the individual participant’s personal situation. Factors such as age, retirement date, contribution rates, spending needs, and risk capacity/tolerance are considered. Unlike target date and risk-based funds, managed accounts are generally comprised of investments offered on the single asset class tier of the menu.

Managed accounts, as an opt-in service, may be beneficial to participants with more complex financial situations (generally older participants with higher account balances), suggesting the need for a more tailored approach. Similar to the custom products previously mentioned, managed accounts introduce a number of potential fiduciary implications that should be considered including: fee analyses, performance benchmarking, and understanding asset allocation methodology.

Self directed brokerage window: the ability to direct trading within a brokerage’s offerings through a retirement plan such as a 401(k). As opposed to being limited to the investment options within a sponsored 401(k), some participants have the option to set up a “window” which allows them to trade most listed stocks, mutual funds, and exchange-traded funds.

These types of accounts may also be known as a “self directed account” (SDA) or “self directed brokerage account” (SDBA). The freedoms of a brokerage window may be too overwhelming for some participants; however, it may be a viable option for those who understand the increased risks of individual security selection and asset allocation. It can also be a way to allow participants access to additional investments that are not available on the core menu.

Guaranteed Retirement Income option: an in-plan option, typically paired with an option from one of the primary tiers, that allows participants to buy units of an annuity to generate a stream of income at a future date. Participants who want guaranteed stability and income at a future date might find this an attractive option. Features among guaranteed income options vary among providers and there are many ways the products can be structured. To date, adoption in the industry has been relatively slow due to numerous fiduciary concerns including: costs, questions over portability at both the plan and participant levels, and insurer risk.

Company Stock: although less common than it has been historically, some employers still offer company stock as an option on their 401(k) plans. The corporation must be the plan sponsor in order for the security to be treated as company stock for qualified plan purposes. Securities of the parent or subsidiary corporation of the employer can also generally qualify as company stock. There are several pros and cons when offering company stock as an investment option in a 401(k) plan. For example, including company stock can provide employees with pride in company ownership and may also provide possible tax benefits to both employees and the employer. However, adding company stock to the plan’s investment menu also has the potential for lower participant liquidity and may possibly run the risk of under diversification to the participant. Additionally, company stock options have recently been the target of several high profile class action lawsuits.


As previously mentioned, there is no one-size-fits-all solution when it comes to menu design; rather, a variety of approaches could be used. The good news is that plan demographics (e.g., participant sophistication, behaviors, age analyses) can help plan sponsors determine which types of investment options and approaches are most appropriate for their specific plan. We strongly believe that thoughtful investment menu design, which includes asking the right questions and conducting appropriate analysis, can help lead to better participant outcomes and help plan sponsors fulfill their fiduciary responsibilities.

Manning & Napier’s life cycle offerings include target date (age-based) and lifestyle (risk-based) mutual funds (Manning & Napier Fund, Inc. Target Series and Pro-Blend® Series) and affiliate collective investment trust (CIT) funds (Manning & Napier Pro-Mix® CIT Funds, Retirement Target CIT Funds, and MANNING & NAPIER GOAL® CIT Funds).

Because life cycle funds invest in both stocks and bonds, the value of your investment will fluctuate in response to stock market movements and changes in interest rates. Investing in life cycle funds also involves a number of other risks, including issuer-specific risk, foreign investment risk, and small-cap/mid-cap risk as the underlying investments change over time. Investments in options and futures, like all derivatives, can be highly volatile and involve risks in addition to the risks of the underlying instrument on which the derivative is based, such as counterparty, correlation and liquidity risk. Also, the use of leverage increases exposure to the market and may magnify potential losses. Additionally, some target date funds invest in other funds and therefore, may have additional risks associated with the underlying funds. Principal value is not guaranteed at any time, including at the target date (the approximate year when an investor plans to stop contributions and start periodic withdrawals).

For more information about any of the Manning & Napier Fund, Inc. Series, you may obtain a prospectus at or by calling (800) 466-3863. Before investing, carefully consider the objectives, risks, charges and expenses of the investment and read the prospectus carefully as it contains this and other information about the investment company.

Manning & Napier Advisors, LLC (Manning & Napier) provides investment advisory services to Exeter Trust Company (ETC), Trustee of the Manning & Napier Collective Investment Trust funds. The Collectives are available only for use within certain qualified employee benefit plans. The Manning & Napier Fund, Inc. is managed by Manning & Napier. Manning & Napier Investor Services, Inc., an affiliate of Manning & Napier and ETC, is the distributor of the Fund shares.

Print PDF

Related Articles

October 19, 2017

12 Tips for a Secure Retirement

It’s National Retirement Security Week and we’re sharing 12 planning tips that can help as you prepare for retirement and throughout your retirement.

October 13, 2017

Understanding Mutual Fund Distributions

Mutual fund distributions can be confusing. What are they and how do they impact mutual fund investors? Brush up on the basics in this article.

October 13, 2017

Featured Product: Manning & Napier Fund, Inc. Rainier International Discovery Series

Attractive investment opportunities can be found all over the world and small, well-run international companies can provide investors access to some of these compelling opportunities in today's marketplace. However, despite an increasingly globalized world and ever-growing access to foreign markets, international small cap equities remain broadly overlooked and underinvested.

October 09, 2017

October 2017 Perspective

On September 20th, the Federal Reserve announced that it will begin to shrink the size of its balance sheet as it attempts to unwind what has been an unprecedented buildup in central bank assets.