Refining the DC Investment Menu
An Outcomes Orientation
June 24, 2024


DC plan sponsors are rethinking their investment menus with a view to improve retirement security for their participants.

“Will I have enough money to maintain my existing lifestyle in retirement?” American workers have been asking this fundamental question for decades. The answer, unfortunately, remains discouraging.

Refining the DC investment menu webinar

This panel of DC industry experts will share the latest thinking by DC plan sponsors on the investment menu, key solutions being considered, product innovations and the wider regulatory developments that plan sponsors need to keep in mind as they rise to the challenge of improving financial outcomes for American workers.


Drew Carrington
Senior Institutional DC Strategist
Franklin Templeton Institutional
Vikrant Arya
Managing Director
Nuveen Retirement Investing
Lanyon Blair
Senior Vice President, Head of Manager Research and Selection
Voya Investment Management
Howard Moore
Associate Editor, Custom Content
Pensions & Investments
Wednesday, June 26, 2024
2:00 p.m. ET

According to the Employee Benefit Research Institute’s 2024 Retirement Confidence Survey, only 21% of all employees who responded are very confident they’d have enough to live comfortably in retirement, while 28% of retirees who responded felt the same. That’s hardly any change since 1993, the first year of the survey, when 18% of employees said they were confident, and no change from the 28% of retirees who expressed confidence.

Clearly, sponsors of defined contribution plans have their work cut out for them. They are rising to the challenge of improving retirement security and, along with industry providers, they are evaluating and changing investment menus to improve participant outcomes.

Positive impact of rates

The chief catalyst for menu evolution recently has been higher U.S. interest rates. Lanyon Blair, head of manager research and selection at Voya Investment Management, pointed out that “rates are higher than we’ve seen in a long time. As a result, higher-quality fixed-income instruments can now generate meaningful income. That’s been the biggest shift in what DC plan sponsors and participants have become more interested in, and it’s had significant implications.”

The first such implication, Blair said, is that demand for income-oriented equities has fallen because investors can use less volatile fixed-income instruments to generate sufficient levels of income. These instruments are also often of higher quality with lower duration.

Another implication of higher rates is a greater focus on U.S.-dollar investments. “We see more demand for dollar-based investments in both equities and fixed income. In addition to rising U.S. rates, this is because the economy and corporate fundamentals in the U.S. are so strong,” Blair said. “All of this leads to a much more attractive dollar. It’s a big reason why some plan sponsors and big institutions around the world have shown an increasing appetite for dollar-based investments.”

Drew Carrington, senior institutional DC strategist at Franklin Templeton, said that higher interest rates compel DC plans to reevaluate their capital preservation options on the investment menu. “Capital preservation tends to be a significant slice of a plan lineup, perhaps up to 10% of assets. It’s an area that isn’t given the attention it deserves and isn’t reconsidered often enough.”

“We think the current environment is a time for plans to reevaluate what they have for their capital preservation strategy, and if they’re giving enough attention to it and offering enough options,” said Meg Whelan, institutional DC strategist at Franklin Templeton. “Participants that are closer to retirement are looking to derisk, and capital preservation options can be a great way to do that.”

As for specific menu options, Carrington noted that the most popular are money market funds and stable-value products — and more DC plans are adding both. “Our view is that the long-term case for capital preservation is strong. We think that stable value is a superior solution, but there are plans that see a need for one or both of these options,” he said.

Reevaluating the QDIA

As DC menus evolve, plan sponsors are paying particular attention to the qualified default investment alternative. The most common QDIA is, of course, the target-date fund. How are plans evaluating it today?

There’s no question that everyone is trying to think about the best way to incorporate some sort of income focus or income guarantee for participants.
Lanyon Blair
Voya Investment Management

According to Brendan McCarthy, Nuveen’s head of retirement investing, many plans are responding to market shifts by evaluating and, if needed, fine-tuning their target-date funds. “When you see market cycles shift, it’s important — always — to stay the course and remember that 401(k) portfolios and, in particular, target-date funds, such as they’ve been built, are broadly diversified and designed for the long term, whatever the various market cycles that they will endure over that 40-year time horizon,” he said.

Yet with higher interest rates benefiting fixed-income yields, “we are seeing an interest in active fixed-income managers that have successfully navigated the recent interest rate cycle,” McCarthy said. In addition, plan sponsors are looking more closely at fixed-income annuities as a replacement for bonds. “You have an instrument that can provide returns similar to those of the bond market, but they can do it with less volatility. As an added benefit, they can provide that option of guaranteed income at retirement,” he said.

Benchmark Returns vs. Active Management
Source: Morningstar, Voya Investment Management. As of 3/31/2024

Enhancing the TDF

Many DC plans today are focused on their target-date funds’ ability to provide income. “We view this as the beginning of a big shift in the market,” McCarthy said. “Plans are moving from traditional target-date funds, which are designed to help participants accumulate savings in retirement, to income-embedded target-date funds. These funds are designed to help accumulate savings, but additionally to decumulate those savings in a way that participants aren’t at risk of running out of income in retirement.”

For the most part, the income-embedded target-date fund operates the way the traditional model does, McCarthy said. The difference is that during accumulation, the income-embedded fund invests in underlying annuity instruments that give participants the option of converting a portion of their account balance into guaranteed income at retirement.

Voya’s Blair sees larger DC plans increasingly looking to tailor their target-date glidepaths to better reflect their participant demographics. Some have steeper glidepaths that lower the equity allocation as participants get closer to retirement, a move that aims to provide more growth that can sustain retirement income for a longer period. Other DC plans have raised their fixed-income allocation, particularly in higher-quality holdings, as participants approach retirement age, trimming exposure to equity market risks accordingly.

Active-passive blend

Some target-date managers combine active and passive allocations, a development that’s also grown in the defined contribution world. According to the Callan Institute’s April 2024 Defined Contribution Trends Survey, 36% of target-date funds combined active and passive managers, while 43% used only indexed strategies. Voya takes the blended approach, which offers two key potential benefits to DC plan sponsors, Blair said. The first is that the use of passive management can save on fund expenses. For plans that are predominantly or exclusively using actively managed funds, “moving to a mix of active and passive could bring fees down substantially if it’s done in a thoughtful way,” he said.

Second, the blended approach can help a target-date fund’s risk profile by choosing active managers for asset classes where they can add the most value, especially the less-efficient ones like securitized fixed income and non-U.S. equities, while “passive management works better with more-efficient categories like U.S. large caps or Treasury Inflation-Protected Securities,” Blair noted. “Using passive also allows you to concentrate your active managers where you get the most bang for your buck and, in many cases, it has led to better long-term performance at lower fees.” (See chart on benchmark returns versus active management.)

Need for customization

In Franklin Templeton’s 2024 Voice of the American Workplace survey, 84% of 401(k) plan participants who responded said they’d be interested in a personalized investment option. DC plan sponsors are listening: More of them are customizing their investment menus to address participants’ unique needs and circumstances. (See visual on workers’ desire for personalized DC plans.)

Kevin Murphy, Franklin Templeton’s head of institutional retirement sales and strategic growth, agreed that customization is needed. “There’s a tendency in the retirement industry to assume that participants are all alike and that their behavior and preferences stay the same over the course of their working career and investing experience,” he said. “We don’t think plans should operate under these assumptions. They need to offer menu options that are relevant to different cohorts of participants based on age and time until retirement.”

Murphy emphasized the importance of making investment advice available to all plan participants. “We feel strongly about the ability not just to deliver advice, but to democratize it for those that might not have access to financial advisers. Our goal is to provide access to advice, at a reasonable price. Too often advice is regarded as an expensive target-date fund, and that is not necessarily the case. We also believe in providing solutions across the QDIA continuum. TDFs have worked extremely well, especially in helping more U.S. workers get started saving and investing in a professionally managed and diversified portfolio in their workplace retirement plan.”

DC plan sponsors, Murphy said, are at an inflection point in their ability to provide customized advice at scale through their plans. “There’s a lot of work being done on advice and a variety of solutions are becoming available in the marketplace,” he noted. “We’re seeing advice as a major topic of interest across all market segments — in the mega-plan space all the way down to the micro market. It’s only going to grow going forward.”

Workers Want a Personalized Plan
Source: Voice of the American Workplace, Franklin Templeton, January 2024.


DC plans are deploying income strategies and alternatives, adding options such as managed accounts and answering the call for ESG investing.

A transformative trend driving the retirement plan industry in recent years has been the need to address the lifetime income needs of retirees. Increasingly, DC participants want their income in retirement to be consistent and guaranteed, similar to what it could be under a defined benefit plan. But a single investment solution to the income challenge has proved elusive — and that has sprouted a variety of income solutions by industry providers for sponsors to consider.

[Annuities] can provide returns similar to those of the bond market, but they can do it with less volatility. As an added benefit, they can provide that option of guaranteed income at retirement.
Brendan McCarthy

“As much as plan sponsors and their investment managers would like to deliver steady lifetime income through standardized products, doing so is actually a very complex undertaking,” said Blair at Voya Investment Management. “Each plan sponsor has a unique challenge that they’re trying to solve for, and there really isn’t one solution that is best for all plan sponsors.”

“There’s no question that everyone is trying to identify the best way to incorporate some sort of income focus or income guarantee for participants,” Blair said. “We’ve had so many conversations with plan sponsors on this over the years, and their needs vary tremendously. At this point, many are taking a wait-and-see approach.”

Given the lack of uniformity in sponsors’ requirements with varying participant demographics and plan approaches, Blair said, a vast number of retirement income options have emerged in the industry. Some aim to incorporate annuities or guarantees through a target-date strategy. Others offer participants a choice by providing the option to allocate a portion of their investments to an annuity in retirement. This type of solution tends to be appealing, as many plan sponsors are concerned about defaulting participants into an annuity, particularly given concerns around portability and cost.

Guaranteed or not?

When DC sponsors are evaluating the many income solutions that have come to market, a good starting point would be to divide the solutions into guaranteed and nonguaranteed solutions, said Nuveen’s McCarthy.

Guaranteed income products are the most prevalent and can be categorized in one of two groups: in-plan or integrated income solutions, which generally are target-date funds with embedded income and a second group often referred to as “check the box” approaches, he said.

McCarthy noted that of the two, the income-embedded target-date funds tend to have higher adoption rates. The second check the box option tends to be considered when “a plan sponsor doesn’t change anything about the plan’s accumulation and savings aspects but wants to provide participants with some form of income option at retirement,” McCarthy said. “The most common of these options is an annuity supermarket: Your plan stays the same, but at retirement, you give participants the ability to roll over part or all of their account balance into one of a small selection of institutionally priced annuities.” (See visual on DC participants’ wish for lifetime income.)

Core vs. noncore

Another aspect of boosting retirement income for participants is providing access to options beyond the core menu and the default option, such as noncore options with more customization. Most DC investment plans typically have approximately nine core asset-class options besides the QDIA. To keep the overall investment menu streamlined, plan sponsors have to be creative with a selective inclusion of noncore options.

Nuveen’s McCarthy explained that noncore options aren’t on default or core menus, and thus aren’t accessible to all participants. Instead, they’re available inside managed-account and multi-asset options, where advisers can use them to address and build participant-specific allocations.

Managed accounts can also be appropriate for plans to provide alternative investments, including private real estate, private credit and private equity, as a way to further diversify the portfolio, he said. “We’re starting to see, mostly among larger plans, not just interest, but actual activation of those strategies into investment portfolios, generally as a sleeve inside of a larger multi-asset strategy, which helps with the liquidity component.”

Taking a fiduciary view, plan sponsors may see alternatives as too risky for most participants. “Some sponsors have great interest in alternatives, but don’t want to make them broadly available to the general 401(k) population,” McCarthy said. “So they provide them as noncore options that advisers can use inside a managed account, where they make sense for some participants. A number of record keepers offer the technology that makes this possible.”

The alternatives debate

“We’re seeing more interest in alternatives and expect to see more plans incorporate a variety of alternative asset categories,” said Franklin Templeton’s Carrington. “The most likely vehicle for them would be some sort of professionally managed solution, whether it’s inside a target-date fund or a managed account. It might also be available as a white-label investment option, where participants aren’t being asked to make portfolio-management allocation decisions to individual alternative asset classes.”

We’re seeing more interest in alternatives and expect to see more inclusion. The most likely vehicle for them would be some sort of noncore professionally managed solution.
Drew Carrington
Franklin Templeton

Two of the biggest hurdles to the adoption of alternatives in DC plans are their relatively high fees and low liquidity — but Carrington doesn’t buy either argument. With regard to fees, he emphasized that alternatives should be evaluated for their ability to deliver risk-adjusted returns. “If adding, for example, private real estate improves the Sharpe ratio of your participants’ portfolios on a net-of-fee, risk-adjusted basis, then it should be considered. We shouldn’t be avoiding alts because the headline expense ratio is higher. That is not good fiduciary protocol.”

Carrington is equally blunt about liquidity, declaring that the perceived need to quickly liquidate the $10 trillion in U.S. DC plans is theoretical at best. “We don’t need next-day liquidity on every dollar in the system. There are all kinds of ways to manage liquidity, such as inside a target-date fund or a white-label investment option,” he said. “There’s no liquidity requirement in ERISA or, generally, in plan documents. We should separate the notion of daily valuation from daily liquidity or we risk falling into this trap of saying everything in the entire system has to be liquidated by tomorrow. It’s just not the right way to think about the problem.”

For DC plans, though, the liquidity profile of alternatives continues to be a stumbling block, said Blair at Voya Investment Management. Alternative investments, particularly illiquid investments, are often not fully redeemable as quickly as plan sponsors may require. Scenarios that require liquidity include a plan takeover when the employer is acquired by another company; plan consolidation; plan transition from one strategy or target-date fund to another; or a record-keeper change. “In our experience, liquidity and fees have been the key reason why alternatives have not had more success in DC plans,” he said.

Looking ahead, Blair is guarded about the prospects for alternatives in DC plans. “While there will be more alternatives available to DC plan participants down the road, we think it will happen much more slowly and incrementally than the industry expects,” he said. “That’s largely because of fees, liquidity and the regulatory environment around redemptions.”

DC Participants Want Lifetime Income
Source: TIAA 2021 Lifetime Income Survey, September 2021.

Shift in ESG

Environmental, social and governance strategies, once the darling of the investment world, more recently have taken a back seat due to currently heated anti-ESG political sentiment. While DC plans continue to be responsive to their employees’ preferences toward ESG investing, their approach has evolved.

Nuveen’s McCarthy sees this shift as a preference by DC plans to continue to make ESG-based strategies generally available without being mandatory. “The offering of an ESG choice hasn’t been impacted by some of the noise that is out there politically in certain states,” he said. “Plan sponsors generally want to be able to present their participants with a choice so that the population of their employees that wants to invest in ESG has the option of doing so. If participants are against ESG, they don’t have to invest in it.”

“Where sponsors do run into potential risk is if they employ ESG broadly across the whole population inside, say, a default fund, and some people may take issue with that,” McCarthy continued. “But the political noise out there hasn’t really changed plan sponsors’ minds about whether they should provide that ESG choice to their employees.”

Voya’s Blair sees a slowdown in the adoption of dedicated ESG strategies, if not a reversal. Today, DC plan sponsors are more focused on understanding how ESG factors are integrated into the existing investment processes of their menu options. ESG risks are “just like other types of risks that investors should be mindful of but not necessarily tilting the entire portfolio to achieve some specific ESG outcome,” he said.

As part of the review of the ESG integration in the investment process, it’s important for DC plan sponsors to determine that there is appropriate disclosure in the manager’s documentation or fund prospectus, Blair added. In short, they try to avoid greenwashing. “That’s why plan sponsors rely on firms like Voya or others who manage target-date funds or their underlying investments,” he added. “We have our own manager research and due diligence teams to ensure that what investment teams say they’re doing is what’s actually happening.”



Recent regulations — particularly from SECURE 2.0 — are forcing DC plan sponsors to rethink the array of provisions and potential impacts on the investment menu.

Market forces and retirement security shortfalls aren’t the only factors pushing DC plan sponsors to rethink their investment menus. Federal regulatory requirements — whether enacted or in the pipeline — could affect menu options as well.

The biggest impact is likely to come from SECURE Act 2.0, which became law in 2022. Building on the foundation of the first SECURE Act, the Setting Every Community Up for Retirement Enhancement Act of 2019, SECURE 2.0 includes multiple provisions that DC plans must implement.

“The whole industry is trying to juggle all of this, as well as the latest iteration of the Department of Labor’s fiduciary rule,” said Franklin Templeton’s Murphy. “Record keepers have a heavy lift. They have to implement the administrative side of over 100 provisions for things like emergency savings accounts, student loan reimbursements, student loan payments’ eligibility for a plan matching contribution and new kinds of hardship or emergency withdrawals, in addition to the Rothification of catch-up contributions.”

Murphy singled out the increase in the age for required minimum distributions as especially relevant for plan menus. SECURE 2.0 changed the RMD age to 73 from 72 starting in 2023, rising to 75 in 2033. “In many ways, the industry doesn’t fully know what this change is going to mean,” he said. “It’s an intersection of regulation and demographics that may be less well understood.”

Historically, participants have waited until they reached the RMD age to make decisions about how they were going to deal with their plan assets. As a result, many people remained in their plan until they were forced to decide whether to start taking withdrawals from the plan or roll it over to an IRA.

“Raising the RMD age means that more people with more money are going to stay in their plan longer — meaning that there will be more participants who are thinking about income options and risk reduction,” Murphy said. “This, in turn, means that capital preservation options and those on the lower end of the risk spectrum more generally should become more important and attract larger allocations.”

Read: A fiduciary’s guide to offering lifetime income

Works in progress

Another significant DC regulation making its way through the legislative process is the Expanding Access to Capital Act. A key provision of this act, which was approved by the House of Representatives in March 2024, would allow 403(b) plans — that are mainly for employees in government, educational institutions and nonprofit organizations — to include collective investment trust structures in their menus — a provision that is already available to 401(k) plans. “This would be a welcome, and long overdue enhancement for retirement savers in a plan segment ripe for modernization. In addition to the cost savings relative to other vehicles, this would open the door for innovation and customization of investments to allow for plan sponsors to cater to the needs of their employees,” said Franklin Templeton’s Whelan.

Given the positive regulatory support from the SECURE Acts, Nuveen continues to remain focused on the inclusion of lifetime income options in DC menus. “We feel that more plan sponsors are starting to shift their plan design and incorporate this solution into their plans. This is something that will help the American worker achieve the retirement security that is missing today in workplace retirement plans,” McCarthy said.

McCarthy also noted that several proposals that would allow for guaranteed lifetime income are in the congressional hopper. He highlighted the Lifetime Income for Employees Act, which would facilitate the use of some annuities within QDIAs. “The strong government relations team at our parent, TIAA, is helping educate members of Congress on the retirement needs of the American worker,” he said.