Employers Offer Diverse Range of 401(k) Investment Options

Employers offer a wide range of investment options, according to “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans” from BrightScope and the Investment Company Institute (ICI). On average, employers offer 27 investment options in their plans, including a mix of equity funds, bond funds and target-date funds (TDFs).

Employers also use simple matching formulas to encourage employee contributions, and plan fees continue to decline.

“Employers recognize the importance of being able to customize the design of their 401(k) plan to suit their workforces, which is one of the strengths of the 401(k) system,” says Sarah Holden, ICI senior director of retirement and investor research. “Employers use the flexibility of the 401(k) system—including a wide variety of investment options and the structure of employer contributions—to build plans that encourage employee participation and make it easier for participants to plan and save.”

The average total plan cost in 2016 was 96 basis points, down from 1.02% in 2009.

“The 401(k) marketplace is constantly evolving and with that, the overall costs of 401(k) plans for participants have declined,” says Brooks Herman, vice president of data and research at BrightScope, an Institutional Shareholder Services Inc. business. “There are a variety of factors contributing to the decrease of fees and expenses in plans, including increased competition, the growing size of the 401(k) marketplace and public disclosure of plan costs. All of these factors benefit participants and help them continue to grow their retirement nest eggs.”

The study also found that for large 401(k) plans with more than $250 million in plan assets, the average domestic equity expense ratio fell from 65 basis points in 2009 to 45 basis points in 2016.

In 2016, 85% of large plans covering more than nine out of 10 participants had employer contributions. Among these plans, 6% make contributions automatically, even if participants don’t contribute themselves.

More than half of the large 401(k) plans automatically enroll participants. For mega plans, with more than $1 billion in assets, automatic enrollment is used by nearly 60% of the plans. A mere 20% of micro plans with $10 million or less use the practice.

Essentially all large 401(k) plans included domestic equity funds, international equity funds and domestic bond funds. Eighty percent offers TDFs, 69% offers guaranteed investment contracts, 65% offered balanced funds, 44% offered money market funds and 30% offered international bond funds.