Defined benefit (DB) plans consistently report better returns — as much as 0.9% higher per year1 — than defined contribution (DC) plans. The Pension Protection Act gave plan sponsors tools to narrow this gap, such as investment re-enrollment and target date funds (TDFs) as default investments. These have helped improve investing behavior for many participants, but what about the 63% of DC plan participants who still make their own investment decisions?2
Plan sponsors can set up better decision-making from these participants by simplifying their investment options. Fewer and easier-to-understand menu choices can encourage more appropriate selections, leading to better potential outcomes. Sponsors can facilitate this with a few steps:
- Reduce the number of menu options to simplify decision-making.
- Re-label menu options around easily understood life goals to better align with participants’ retirement objectives.
- Re-organize menus using broader more flexible options to maintain diversification with fewer choices.