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M*: Bigger Is Better: Defined Contribution Menu Choices With Plan Defaults
FYI: Prior studies of core investment-menu size in defined contribution plans found that smaller menus improve employee participation rates by reducing choice overload. The widespread adoption of automatic enrollment and default investments requires revisiting this research to determine its continued relevancy. Using data from more than 500 defined contribution (DC) plans with approximately a half-million participants where core menus vary between approximately 10 to 30 investment options, we find that acceptance of the default investment option increases by approximately 0.7% for each additional fund in the core menu. Additionally, portfolio efficiency increases among self-directing participants with access to large core menus because they tend to hold more funds, which results in more-diversified portfolios. Our findings suggest that increasing a plan menu from 10 to 30 funds could result in an approximate 10-basis-point increase in the total expected risk-adjusted return (i.e., alpha) for a defined contribution plan when considering the dual benefit of higher default investment acceptance and more-efficient portfolios among participants who choose to build their own portf Regards, Ted https://www.morningstar.com/content/dam/marketing/shared/pdfs/workplace/wp_Bigger_Is_Better_final.pdf?cid=EMQ_&utm_source=eloqua&utm_medium=email&utm_campaign=&utm_content=19313
