Fewer Choices for Better 401(k) Results?

When it comes to retirement plans, there are those who prefer the no-fuss cruise control of target date funds. There are others who prefer to get their hands dirty and choose their own slate of investments.

But what about those somewhere in between -- the folks who want a combination of simplicity, diversity and strategy that neither option fully affords them?

That space between target date funds and a plan's set of core options is where J.P. Morgan Asset Management(JPM) has set its sights as it promotes a "fundamental rethinking" of the traditional menu of investment choices offered by most U.S. defined-contribution plans.

This morning, the firm unveiled Core Menu Innovation, an effort to "replace overly complex and redundant fund lineups" with a simplified menu of just three investment portfolios: one consisting of diversified stock strategies, another with diversified bond strategies and one with diversified cash alternatives. Investors can allocate these strategies as they see fit and use them as an easy way to inject more challennging assets like commodoties, REITS and global stocks and debt into their portfolio.

"The 401(k) plan is the primary retirement savings vehicle for most Americans today, so it's critical that we help participants make better investment decisions," says Michael Falcon, head of retirement for J.P. Morgan Asset Management. "[Our] research shows that participants who choose to invest on their own rather than participate in some form of professionally managed solution are, on average, falling short of their retirement-savings goals. We have to help them close that gap."

Falcon describes his firm's new approach as "providing fewer, but more sophisticated, investment options" and leveraging the diversification benefits found in target date funds and other professionally managed asset allocation solutions.

"We would believe that most f! or most savers, and for most plans, target date investing is a great solution, if not the best solution," Falcon says. "I think what we've found, however, is that 80% of the investments are still in the core menu. We obviously see better results when investors are broadly diversified and rebalanced, regardless of whether they are in a target date or core menu solution. There are too many people in those core menu investment options who are not broadly diversified."

"We still have a lot of individuals who for a variety of reasons want to have more control," he adds. "They don't want to put everything in a target date fund; 30% of our savers and investors indicate to us that they are interested to some level in self-direction. So the challenge we tasked ourselves with was what sits in between for the individual who doesn't want to choose a target date solution but is overwhelmed and frustrated by the complexity of the core menu."

Falcon tells of being at a recent conference where a speaker relayed research involving Godiva chocolates. One test group was given one choice from six flavors; another group had 30 variations to choose from.

The first group, though disappointed that they lacked as many options, tended to report that they were happy with their selection. The latter group, which initially thought they benefited from a multitude of choices, wound up second-guessing themselves and were less satisfied.

The chocolate choices mirror what investors go through when it comes to a DC plan's investment options. Over the years, they have demanded a greater array of choices. The average 401(k) plan core investment lineup now includes at least 18 different fund choices, and often many more.

"I think individuals find that degree of choice overwhelming," Falcon says.

Research shows that when participants are presented with complex or an overwhelming number of choices, they are most likely to make no choice at all or ! an unedu cated one -- either of which leaves them inadequately diversified and overexposed to individual investment strategies, he adds.

J.P. Morgan Asset Management's approach involves consolidating and streamlining the numerous mutual funds found in an average DC plan into professionally managed stock, bond and cash alternative investment options designed by its Global Multi Asset Group, which is also responsible for its target date fund offerings. Within each consolidated core portfolio, investment choices incorporate diversification across traditional and extended asset classes.

"This allows an investor to mix and match among the three to get the desired outcome, diversification and risk profile that they want," Falcon says.

"I think we in the defined-contribution space have to constantly look at making sure that the best options are presented in ways that are actually used and engaged in by the participant base," he adds. "Target date funds have actually been a huge success, but I don't think we should be resting on our laurels, if you will. We also need to find something for the people who aren't in target date for whatever reason."