Do 401(k) Menus Suffer From a Generation Gap?

A new whitepaper finds that use of fixed income options in 401(k) plans has not kept pace with workplace trends.

Traditionally, fixed income investments have been used to reduce a portfolio’s overall volatility to an acceptable level without significantly reducing returns – but that objective may require reconsideration amidst today’s diverse, multi-generational workforce. A new whitepaper, authored by the research team at the American Retirement Association, and sponsored by Janus Henderson Investors, points out that in the past, investment recommendations may have been more focused on achieving minimum compliance and “checking the fixed income box” rather than anticipating participant investment needs at various life stages.  A multi-generational participant population has more complex needs.

“A participant’s investment needs will vary during the accumulation stage, as a ‘term vested’ participant, and during periods of decumulation as a ‘retiree’,” explains Jack Towarnicky, researcher at the American Retirement Association, and co-author of the report.  “Needs may also change when a surviving spouse steps into the participant’s shoes and continues participation.  Many plans also permit a non-spouse beneficiary to continue the account for a specified period.”

The whitepaper, drawing on the findings of a survey conducted jointly by the Plan Sponsor Council of America (PSCA) and the National Association of Plan Advisors (NAPA), points out that while the vast majority of financial professional respondents said that they considered diversification in their recommendations, fewer than two-thirds of investment professionals (63.4%) confirmed that “correlation with equities” was an “essential” or a “preferred” criterion in recommending fixed income options. 

Critically, particularly in view of the diversity of participant investment practices, as well as participants’ diverse needs and uses of plan assets, fewer than 25 percent of investment professionals consider key participant demographical aspects such as tenure, salary, education level, presence of other benefits (such as a defined benefit pension plan), gender, account balance, and/or ethnicity/race.  

“Today, an ever-increasing number of plan sponsors encourage participants to retain assets in the plan after separation,” comments Nevin Adams, chief content officer of the American Retirement Association, and co-author of the report.  “Additionally, provisions in the Setting Every Community Up for Retirement (SECURE) Act, such as an extension in the required minimum distribution age, and expansions of the safe harbors for lifetime income options may well mean that fiduciaries will – and should – be more attentive to broader consideration of fixed income alternatives in the future.”

“Fiduciaries have long understood the need for a diversified menu of investment options.  However, regardless of plan size, plan provisions, or diverse participant populations, the typical 401(k) plan has three to four times as many equity options as fixed income choices,” comments Towarnicky.  “As the prevalence and amount of guaranteed retirement income from other sources declines (e.g., defined benefit pension plans), and as more participants age into retirement, a more diverse set of fixed income options may be needed for income generation.” 

A copy of the white paper and the full survey is available at https://www.psca.org/research/2020/InvestmentTrends.  

About the Survey

PSCA and NAPA, with sponsorship by Janus Henderson Investors, surveyed plan sponsors and retirement plan advisors (separately) between January 21 and February 21, 2020, regarding current plan menu designs and investment trends. The survey responses were obtained as various equity market indices were still climbing to record levels – the S&P 500 and NASDAQ composite rose to record highs on February 19, 2020 and the COVID-19-driven declines started the very next day.  Responses were received from nearly 100 plan sponsors representing a wide range of plan sizes and industries, and separately from 200 retirement plan financial professionals who are primarily focused on 401(k) plans.

About the Plan Sponsor Council of America and the National Association of Plan Advisors

The Plan Sponsor Council of America (PSCA) is a diverse, collaborative community of employee benefit plan sponsors, working together on behalf of millions of employees to solve real problems, create positive change and expand on the success of America’s voluntary, employer-sponsored retirement system. The National Association of Plan Administrators (NAPA) is the only advocacy group exclusively focused on the issues that matter to retirement plan advisors. Both PSCA and NAPA are part of the American Retirement Association, a non-profit professional organization established to empower retirement plan professionals who are dedicated to building a better retirement for Americans. The American Retirement Association is comprised of five premier retirement industry associations; the American Society of Pension Professionals & Actuaries (ASPPA), the American Society of Enrolled Actuaries (ASEA), the National Association of Plan Advisors (NAPA), the National Tax-deferred Savings Association (NTSA), and the Plan Sponsor Council of America (PSCA).

About Janus Henderson Investors

Janus Henderson Group (JHG) is a leading global active asset manager dedicated to helping investors achieve long-term financial goals through a broad range of investment solutions, including equities, fixed income, quantitative equities, multi asset and alternative asset class strategies. Janus Henderson has approximately $294.4 billion in assets under management (at 31 March 2020), more than 2,000 employees and offices in 27 cities worldwide. Headquartered in London, the company is listed on the New York Stock Exchange (NYSE) and the Australian Securities Exchange (ASX). Learn more about Janus Henderson Investors at janushenderson.com. Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries.
© Janus Henderson Group plc

# # #