CHAPTER 3Plan Investment Structure

Make everything as simple as possible, but not simpler.

—Albert Einstein

Behavioral economists have taught us the importance of investment menu design. In the early days of DC plans, an investment menu may have been as simple as offering just a few investment choices; often these were limited to a single choice each for capital preservation, bonds, and stocks. This narrow set of at least three core investment offerings was not surprising given limited government direction as to the investment structure offered in plans. Under the Employee Retirement Income Security Act (ERISA) section 404(c), participants must be able to select from at least three investment alternatives, each of which is diversified and has materially different risk and return characteristics. According to the Callan Investments Institute’s 2016 Defined Contribution Trends report, most DC plans (81.3 percent) are designed to comply with ERISA section 404(c).1 Today, participant-directed retirement plans maintain far more than three investment choices, and, though there may be overlap among asset classes within an investment array, in the vast majority of retirement plans at least three investments with materially different risk and return characteristics can be identified.

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