Reviewing Your 401(k) Investment Menu: Is It Clear, Diversified, and Appropriate for Your Workforce?

For many employers, the middle of the year is an ideal time to evaluate the health of their 401(k) plan. While much attention is often given to participation rates, matching contributions, and compliance requirements, one area deserves equal consideration: the investment menu.

An effective 401(k) investment lineup should do more than offer a long list of mutual funds. It should provide employees with a clear, well-structured selection of investment options that can fit different ages, risk tolerances, financial goals, and levels of investment experience.

Reviewing your plan's investment menu regularly can help ensure it continues to meet the needs of your workforce while supporting your fiduciary responsibilities.

Why Your Investment Menu Matters

For many employees, their 401(k) account represents their largest long-term investment. The investment options available in the plan can greatly affect retirement outcomes over decades of saving.

ERISA places a fiduciary responsibility on plan sponsors to select and monitor investment options prudently. While investment performance cannot be guaranteed, maintaining a thoughtful review process is an important part of good plan governance.

Is the Menu Easy to Understand?

One common mistake is believing that more investment choices automatically create a better plan.

In reality, too many options can overwhelm participants and lead to decision paralysis. Employees may delay enrolling, avoid changing investments, or place all of their savings into a single option that may not fit their long-term goals.

A well-designed investment menu should include:

• Clearly labeled investment categories.
• Easy-to-understand fund descriptions
• Logical organization by asset class
• Simple educational materials
• Straightforward enrollment tools

Employees should understand what each investment is designed to accomplish without needing advanced investment knowledge.

Does the Plan Offer Meaningful Diversification?

Diversification continues to be one of the basic principles of long-term investing.

Department of Labor regulations generally contemplate participant-directed plans supplying a broad range of diversified investment alternatives with materially different risk and return characteristics, permitting participants to build portfolios appropriate for their circumstances. (Legal Information Institute)

Many plans include investments such as:

• U.S. large-cap stock funds
• Mid-cap and small-cap stock funds
• International equity funds
• Bond funds
• Stable value or money market options
• Target-date retirement funds

Each category serves a different purpose in helping participants build varied portfolios aligned with their retirement objectives.

Are There Options for Every Type of Employee?

Your workforce may include:

• New graduates beginning their careers
• Mid-career professionals building wealth
• Employees approaching retirement
• Highly compensated executives
• Employees with varying levels of investment experience

An effective investment lineup recognizes these differences.

For example:

Younger employees may have longer investment horizons and different risk capacities than employees nearing retirement.

Employees nearing retirement often seek investments designed to help preserve accumulated savings while still permitting continued growth.

Providing investment choices across multiple risk levels helps employees build portfolios that better reflect their individual circumstances.

Are Target-Date Funds Appropriate?

Many plans use target-date funds (TDFs) as qualified default investment alternatives as as simplified investment solutions.

Target-date funds automatically modify their asset allocation over time, generally becoming more conservative as the participant approaches retirement.

These funds can be particularly helpful for employees who:

• Prefer a simplified investment approach.
• Are uncertain how to allocate among multiple funds
• Do not wish to manage their portfolios actively.

Plan sponsors should periodically review whether the target-date series continues to correspond to the demographics and needs of their workforce.

Review Investment Costs

Investment expenses matter because fees reduce long-term returns over time.

While lower cost does not always mean better, employers should periodically evaluate:

• Expense ratios
• Administrative costs
• Revenue-sharing arrangements
• Overall plan costs

Fiduciaries are expected to monitor fees as part of their ongoing oversight process and determine whether they remain reasonable for the services provided. (IRS)

Are Underperforming Funds Being Monitored?

Every investment experiences periods of strong and weak performance.

However, routine monitoring helps determine whether a fund continues to meet the criteria established for the plan.

A review may include:

• Long-term performance relative to benchmarks
• Consistency of investment management
• Changes in investment strategy
• Risk characteristics
• Expense levels
• Whether suitable alternatives now exist

The goal is not to chase short-term returns but to maintain a disciplined, documented review process.

Don't Forget Participant Education

Even the best investment lineup cannot help employees who do not understand how to use it.

Providing regular education can improve participant confidence and engagement.

Topics may include:

• Basic investing concepts
• Diversification
• Risk versus return
• Asset allocation
• Rebalancing
• Retirement income planning

The Department of Labor recognizes the value of investment education that helps participants make well-informed decisions without crossing into individualized investment advice. (eCFR.io)

Questions Every Employer Should Ask

As you review your investment menu, consider asking:

• Is our lineup easy for employees to understand?
• Does it provide appropriate diversification?
• Are investment options aligned with our workforce demographics?
• Are target-date funds still appropriate?
• Are investment expenses reasonable?
• Are funds being reviewed on a consistent schedule?
• Are employees receiving enough education to make well-informed decisions?

If the answer to any of these questions is uncertain, it may be time for a comprehensive review.

How DWAM Can Help

At Duncan Williams Asset Management (DWAM), we understand that selecting and monitoring a 401(k) investment menu entails balancing fiduciary responsibilities with the realistic needs of your employees.

Our team can help employers:

• Review current investment lineups.
• Evaluate diversification across available investment options.
• Assess fee structures and investment oversight processes.
• Support participant education initiatives.
• Coordinate with plan providers and other service partners.
• Help sponsors develop a disciplined process for ongoing investment reviews.

A thoughtful investment menu can support employee confidence while helping employers maintain a strong governance process for their retirement plan.

Disclosure

This article is provided for informational and educational purposes only and should not be construed as legal, tax, accounting, or investment advice. Investment products involve risk, including the possible loss of principal. Diversification and asset allocation do not guarantee a profit or protect against loss in declining markets. Plan sponsors should consult with their ERISA attorney, tax professional, recordkeeper, or qualified retirement plan advisor regarding their specific fiduciary responsibilities and plan design decisions. Duncan Williams Asset Management is a registered investment adviser. Registration does not imply a certain level of skill or training.

Source URLs

• Internal Revenue Service – Operating a 401(k) Plan: https://www.irs.gov/retirement-plans/operating-a-401k-plan
• Internal Revenue Service – Retirement Topics: Plan Assets: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-plan-assets
• Internal Revenue Service – Participant-Directed Accounts: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-participant-directed-accounts
• Internal Revenue Service – Retirement Plan Investments FAQs: https://www.irs.gov/retirement-plans/retirement-plan-investments-faqs
• U.S. Department of Labor / ERISA Regulation 29 CFR §2550.404c-1: https://www.law.cornell.edu/cfr/text/29/2550.404c-1
• Congressional Research Service – Department of Labor Guidance and Regulations on Selecting Private-Sector Pension Plan Investments: https://www.congress.gov/crs_external_products/IF/HTML/IF12328.html

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