Employers’ Role in Crafting Diverse Investment Lineups

In the realm of retirement savings, 401(k) plans have long been a cornerstone for many Americans. These plans offer a crucial pathway towards financial security during one’s golden years. A recent study conducted by BrightScope, an ISS Market Intelligence entity, in collaboration with the Investment Company Institute (ICI), delves into the dynamics of 401(k) plans. Titled “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2020,” the study sheds light on the evolving landscape of investment options within these retirement vehicles.

One of the study’s key findings underscores the pivotal role that employers play in shaping the investment offerings within 401(k) plans. The research, which examined data from 2020, reveals that, on average, large 401(k) plans provided participants with access to 28 distinct investment options. These options typically encompassed approximately 13 equity funds, three bond funds, and nine target date funds.

According to Sarah Holden, ICI Senior Director of Retirement and Investor Research, “This study illustrates that employers recognize the importance of customizing investment menus of their 401(k) plans to suit their employees and promote saving and investing for retirement. The wide range of investment options that employers offer allows investors to choose between a straightforward target date fund, or to personalize their asset allocation as they see fit.”

An Era of Expansion: The Rising Popularity of Target Date Funds

Over the course of 14 years, between 2006 and 2020, large 401(k) plans have experienced a significant evolution in their investment offerings. On average, they added six new investment options to their lineups, increasing from an average of 22 options in 2006 to 28 in 2020. Notably, a substantial portion of this growth can be attributed to the increasing prevalence of target date funds.

In 2006, a mere 32 percent of large 401(k) plans featured target date funds. However, this number skyrocketed to an impressive 87 percent by 2020. The appeal of target date funds also extended to plan participants, with the percentage of those offered these funds surging from 42 percent in 2006 to a remarkable 84 percent in 2020. Furthermore, assets allocated to target-date funds soared from 3 percent in 2006 to a substantial 28 percent by 2020.

Driving Down Costs: A Positive Trend for Investors

Another noteworthy revelation from the study pertains to the overall cost of 401(k) plans. The research indicates that the average total plan cost has been on a downward trajectory since 2009. In 2020, the average total plan cost stood at 0.83 percent of assets, marking a significant decrease from the 1.02 percent observed in 2009. These cost reductions extend to participants, with the average participant experiencing a lower-cost plan, amounting to 0.51 percent of assets in 2020, down from 0.65 percent in 2009. Moreover, the average dollar invested in a plan exhibited a similar trend, with a total plan cost of 0.34 percent in 2020, compared to 0.47 percent in 2009.

This positive shift in cost dynamics signals that both plan sponsors and participants have become increasingly conscientious about fees and expenses. Brooks Herman, Executive Director for Data and Research at ISS Market Intelligence, highlights this trend, stating, “The decrease in 401(k) plan cost suggests that 401(k) plan sponsors and participants are paying attention to fees and expenses. Falling investment management costs have contributed to the decline in total plan cost, including across the variety of mutual funds included in 401(k) plan lineups.”

Exploring the Landscape: A Glimpse into Investment Choices

The study also provides valuable insights into the composition of 401(k) plan assets. Mutual funds emerged as a dominant force, accounting for 40 percent of large private-sector 401(k) plan assets in 2020. Collective investment trusts (CITs) followed closely, holding 38 percent of assets, while guaranteed investment contracts (GICs) secured 6 percent. Separate accounts represented 3 percent of assets, with the remaining 12 percent diversified across individual stocks (including company stock), individual bonds, brokerage, and other investments.

Furthermore, index funds emerged as a significant component of 401(k) assets, commanding 41 percent of the market in 2020. These funds, known for their cost-efficiency, were widely accessible across all plan sizes. A staggering 95 percent of 401(k) plans with assets exceeding $10 million offered index funds in their lineups in 2020. Even among smaller plans, those with less than $1 million in assets, 86 percent featured index funds.

The rise of index funds is attributed to their typically lower expense ratios when compared to actively managed equity funds, making them an attractive choice for cost-conscious investors.

Automatic Enrollment: A Growing Trend

Additionally, the study explored the prevalence of automatic enrollment within 401(k) plans. It revealed that larger plans were more likely to embrace this approach. More than half of large 401(k) plans with assets exceeding $100 million reported automatic enrollment for participants. For plans with assets surpassing $1 billion, an impressive six out of ten adopted automatic enrollment.

About the Study

This comprehensive report, a part of The BrightScope/ICI Defined Contribution Plan Profile series, offers a detailed examination of private-sector 401(k) plans in the year 2020. It begins by analyzing large 401(k) plans in the Department of Labor’s 2020 Form 5500 Research File. Subsequently, the focus shifts to a dataset encompassing nearly 60,000 audited 401(k) plans housed within ISS Market Intelligence’s BrightScope Defined Contribution Plan Database.

These plans typically feature between four and 100 investment options and have a minimum of 100 participants. The analysis excludes private-sector 403(b) plans, and for an in-depth exploration of 403(b) plans governed by the Employee Retirement Income Security Act of 1974 (ERISA), one can refer to “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at ERISA 403(b) Plans, 2019” (April 2023).