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By Mark Olsen, Managing Director at PlanPILOT

When it comes to selecting the investments for the retirement plan, many plan sponsors and/or the benefits committee focus far too heavily on selecting “the best funds.” In reality, there is far more to an effective lineup than whether this fund or that has a “five star” or “five moon” rating.

In fact, the structure, not the ratings, of the investment lineup has a far greater impact on participant outcomes as well as fiduciary risk. A well-structured line-up can help improve decision-making, reduce participant confusion (and thereafter reluctance to enroll), as well as strengthen fiduciary defensibility—even if the underlying fund selections are simplified and perhaps similar in some ways to each other.

At PlanPILOT, one of our core strengths as a retirement plan consultant is our ability to look “under the hood” of participant plans and work with our clients to not only improve what is measurable, but also what is ultimately meaningful in achieving excellence with a benefits program. Let’s look at the issue of investment selection in a retirement plan and how to strengthen the structure of the lineup and to maximize results.

Framing the Problem

For many plan committees, the semi-annual or quarterly investment review is a hunt for the “best funds.” Hours are spent scrutinizing performance spreadsheets, chasing top-quartile performers, and replacing funds that underperformed their benchmark last year.

Plan sponsors often feel immense pressure to pick “winners,” yet the investment industry is cyclical; today’s top-performing fund is often tomorrow’s median or underperforming fund, a concept known as “reversion to the mean.” Selecting funds based on recent performance, or who’s the “hot manager,” is not a good foundation to promote participant success in saving and investing for their future.

The problem, therefore, lies not in whether good investments are selected, but in the question asked. Instead of: “Are we offering the best funds?” the question and objective ought to be:

“Is our investment lineup designed for how participants actually make decisions?”

How those decisions will be made can result in better outcomes, both in encouraging participation in the plan and in participants having the confidence to contribute in order to reach their own retirement goals. In other words, how the plan and its investment menu is designed and structured will ultimately shape the behavior of the participants. This is an often overlooked concept in plan design.

Where Plan Sponsors Go Wrong

Here are areas where plan sponsors and the committees often go astray:

• Overloaded menus: When committees focus on offering many “great” funds, they often create a menu with too many options. Studies have shown that employees overwhelmed by too many choices often freeze, fail to enroll, or default to improper allocations. 
• Lack of clear hierarchy or tiers: A lack of a clear hierarchy or tiered structure (core vs. supplemental vs. specialized) in investment menus is a significant problem that causes employee confusion, “analysis paralysis,” and potentially lower investment returns for the participant.

Without tiers, participants may struggle to identify foundational funds (like core funds or target-date funds) versus specialized options, leading them to either avoid the plan entirely or build sub-optimal portfolios 

• Misalignment between:

• • • QDIA (The default target retirement date fund)

• Core menu (The core index funds of U.S. equity, international and bonds)

• • • Supplemental/active funds (For further diversification or outperformance)
    • Brokerage window (If offered, for other investments not in the core menu) 
  • Treating lineup changes as incremental fund swaps, rather than strategic redesign: This is the result of continually trying to find “a better fund.” 

• Failure to revisit structure as plan demographics evolve: As your workforce changes, so must your plan design. Older workers may require different plan features than a younger, more tech-savvy participant base.

Why Structure Matters

The investment menu structure( the framework that dictates which asset classes are available and how they are presented) has a more direct impact on participant outcomes.

1. Participant Behavior

• Participants don’t optimize, they simplify: it’s nearly a certain human trait to avoid making a mistake.
• Poor structure leads to:
  • Decision paralysis
  • Over-diversification or concentration
• A thoughtful structure nudges better outcomes without requiring expertise.

2. Fiduciary Oversight

• A coherent structure demonstrates the plan sponsor’s procedural prudence.
• Easier to justify decisions in:
  • Committee documentation
  • DOL audits
• Shows intentional design vs. ad hoc fund accumulation

3. Governance Efficiency

• Streamlined lineup = more effective monitoring
• Reduces noise in:
  • Investment reviews
  • Watchlist decisions
• Allows committees to focus on material issues that occur from time to time

Best-Practice Framework

To build a robust lineup, focus on a “less is more” strategy and a tiered approach, as follows:

• Start with a default QDIA choice: This would be the target-retirement-year (TDF) selections that closely match the participant’s anticipated year of retirement. Such investments automatically rebalance the risk allocation on a time-horizon basis and are considered appropriate for those wishing an all-in-one approach to their retirement investments. 
• Implement a core-and-satellite approach: Implement a strong core (TDFs or index funds) that covers major asset classes. Add “satellite” funds only if they serve a specific, necessary role.
• Simplify the diversification approach: As an example, the federal Thrift Savings Plan (TSP) uses a limited number of high-quality, broad-index funds. This approach is simple, low-cost, and effective.
• Use a defined Investment Policy Statement (IPS): Your committee should adopt an IPS that focuses on the process of monitoring, not just selecting. This ensures that when a fund is removed, it’s due to a failure to meet predefined, qualitative criteria, rather than a subjective emotional reaction to performance.
• Limit options to reduce participant overwhelm: A strong menu rarely needs more than 15-20 options. Reducing excessive choices often improves employee participation and satisfaction.
• Include proper fixed-income options: Confirm the menu offers enough variety for risk-averse employees, such as a stable value or money market fund, an intermediate-term bond fund, and an international bond fund. A frequent complaint among participants is the emphasis on diversifying the equity (stock) menu but the fixed income menu is limited to 2-3 choices.

Build the House First, Then Add the Pictures

For plan sponsors, the duty of prudence is best served by creating a retirement plan structure that helps employees make good decisions. By focusing on a well-designed, simplified investment menu rather than hunting for “hot” funds, committees can better meet their fiduciary obligations, reduce costs, and, ultimately, improve the retirement stability of their employees.

How Do You Reach Excellence in Your Retirement Plan?
Talk With Us.

At PlanPILOT, we’re creating the standard for client experience. Independent and impartial by design, we apply our skill to each facet of plan development, governance, and implementation to help you enjoy meaningful results. Our client partnerships are built on trust, communication, and responsibility—cornerstones of a healthy, prosperous relationship. We’re committed to providing objective guidance, informed innovation, and an integrated approach tailored to your unique objectives.

Our team of seasoned professionals upholds the highest professional standards, so every strategy we recommend aims to support both your organization and the participants who depend on it.

To learn more about how we can help with fiduciary oversight and improving the effectiveness of your benefits program, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.