Most participants in defined contribution plans are not on track to achieve retirement income adequacy. A key reason is that the investment lineups in most DC plans are structured in a way that reduces participants' likelihood of implementing well-diversified and age-appropriate investment strategies. Since they are not investment experts, most DC participants would benefit from a simplified lineup, guiding (but not forcing) them into professionally designed portfolios.
Target-date funds are not for everyone. Therefore, it is beneficial to build the core lineup on the same tenets and investment principles as the custom target date funds. Consistency in investment philosophy and construction provides participants with better resources, and sponsors with more efficient governance.
Can the core funds take a page from the diversification and communication benefits of target date funds? The answer is “Yes,” provided that they are combined to clearly highlight and define their investment objectives.
Today's most common DC investment lineups confuse participants with about 13 asset-style funds, most of which are named with technical investment jargon, making it difficult for most participants to effectively build portfolios. It is not surprising that plan data shows participants using today's investment lineups have poorly diversified asset allocations. Aon Hewitt studies show that 14% of participants select only one or two asset classes to build their portfolios. Too much choice doesn't result in improved diversification for participants. The DC lineup of the future will mitigate this problem by replacing today's core options with the optionality of a simple passive tier and a custom multi-asset class objective-based tier that are professionally managed to improve outcomes. These improvements to participants' asset allocations are critically important to retirement outcomes, as asset allocation drives roughly 94% of investment returns.