Are too many 401k investment menus missing core investment categories?
A study says yes, a concerning issue in the age of fiduciary litigation.
The study from ERISApedia.com titled “401k Portfolio Study of Investment Categories,” notes that based on market data, there are between 12 and 20 core investment categories that comprise approximately 90 percent of all assets invested in 401k plans.
However, even though there is a strong market-based consensus on the number and type of investment categories to include in a 401k-plan investment line-up, “the investment line-ups in most individual 401k plans vary considerably from the 12-20 core investment categories.”
“On average there are about 5.8 missing core investment categories and four extraneous categories per plan for a total variance of 9.8,” it adds. “The variance from the market-based consensus is fairly consistent across all plan sizes and plan sponsor business categories.”
And there appears to be a large number of missing investment categories.
“Taking into account that the average number of core investment categories is 18, the 5.8 missing categories per plan means that approximately one-third of the core investment categories are missing on average for all 401k plans. In addition, approximately 23 percent of plans have an investment category variance of 13 or greater.”
Key findings include:
- The optimal number of investment categories is between 12 and 20. The clustering and distribution of the number of investment categories are not materially affected by plan size or by business category.
- Investments in 401k plans are highly concentrated in a few investment categories as 80 percent of the assets are held in the top ten investment categories and 95 percent of the assets are held in the top 20 investment categories. Any investment category beyond the top 20 holds a trace amount of assets.
- The target-date investment category is by far the most popular in terms of assets with a 30 percent market share of assets. Despite its popularity, the target-date investment category is absent in 20 percent of all plans.
- The stable value investment category is in the second position of average assets per plan even though it is only found in approximately 30 percent of plans.
- Much of the investment category variance is concentrated in plans with less than $10 Million in assets.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
