April 2, 2015

New retirement plan structure aims to increase participation by making options more manageable

When designing the new retirement plan structure, Vanderbilt’s Retirement Plan Oversight Committee considered independent third-party research on how the number of investment choices affects retirement plan participation.


As Vanderbilt’s transition to our new streamlined retirement plan structure progresses, updates on “hot topics” and frequently asked questions are being shared in MyVU and MyVUMC.

Vanderbilt’s new retirement plan structure features a three-tiered investment structure designed to accommodate all employees, from those who want to be less involved to those who want to be very hands-on in managing their investments. When designing this structure, Vanderbilt’s Retirement Plan Oversight Committee considered independent third-party research on how the number of investment choices affects retirement plan participation.

Studies show consumers find it difficult to make decisions when confronted with many choices. The Vanguard Center for Retirement Research writes that more choice means more information to digest and more comparisons to make, which can lead to greater complexity and confusion.

A Columbia University study reported by The Wall Street Journal found that retirement plan participation was higher when employees were offered fewer fund choices. In plans with two investment options, 75 percent of employees participated, but for plans with 60 investment choices, enrollment dropped to 60 percent. For every additional 10 investment choices, on average, participation rates dropped two percent. Plan participation seems to be inversely associated with the number of investment options.

“Our goal is that streamlining the core funds will be better for the majority of employees and lead to higher plan participation,” said Rick Ohmer, senior director of compensation and benefits.

The Wall Street Journal article also cites the Southwest Airlines Pilots’ Association as further support of this theory. The simplicity of that group’s plan, which has 12 core fund options, has resulted in a 99 percent participation rate.

Investors also tend to invest in what they know. Even when plans offer a large number of investment choices, participants tend to invest in just two to three options. Others will choose not to participate at all if they don’t understand their choices.

Reducing the number of funds does not have to mean less diversification. In fact, multiple fund offerings can backfire, resulting in redundant holdings that reduce portfolio diversification, leading to sub-par returns. Fund expense ratios also can be higher when an individual invests smaller dollar amounts in more funds. Investing larger dollar amounts in fewer funds can lower the expense ratios charged to investors on those holdings. For example, Vanguard Admiral Shares are a separate share class of Vanguard mutual funds with lower expense ratios that pass on the savings that result from larger account balances to the investors who own those funds.

“Our core investment options include different types of funds, including small-, mid- and large-cap, international, and bonds, so participants can build a diverse portfolio from a manageable set of options. Furthermore, the expense ratios we are achieving through this consolidation in fund offerings are, in many cases, ‘institutional class’ expense ratios, which are the lowest expense ratios available. These lower fees directly benefit plan participants,” said Richard H. Willis, the Anne Marie and Thomas B. Walker Jr. Associate Professor of Accounting and a member of Vanderbilt’s Retirement Plan Oversight Committee.

The research supports Vanderbilt’s decision to reduce the number of core investment options from more than 350 to 13, plus the target date funds. Employees comfortable managing their own portfolios can still invest in more funds through self-directed brokerage accounts.

Most workforces are composed of employees with varying levels of investment expertise, and Vanderbilt’s new three-tiered retirement plan structure was designed with that in mind. By offering a select number of best-in-class core funds, Vanderbilt is taking another step in making the plan work even better for its employees.