Like a restaurant, a DC plan can structure its investment “menu” in many different ways. The trick is to come up with a menu of investment choices that best suits the plan. While that may sound simple in theory, in practice the complexity of the process of creating the right investment menu can overwhelm many plan sponsors.
In "What's on the Investment Menu?", a six-page white paper written for plan sponsors, the Defined Contribution Institutional Investment Association does a nice job breaking down the process, starting with defining the plan’s objectives, understanding (and harnessing) behavior finance, and then building a menu that that reflects the plan sponsor’s vision as well as participant behavior.
The key takeaway for plan sponsors: One approach that’s working for many plans is using a tiered investment structure to organize their investment options. For example, plans that favor a self-directed philosophy may opt for more choices and more tiers, while plans that favor guiding participants may choose a simpler menu.
For advisors, the white paper is another good door-opener and quick-read backgrounder to hand out to both prospects and clients. On the Must-Read-O-Meter, give this one a “7” on a scale of 1 to 10.
