Case Study: Simplifying a 401(k) Plan Improves Participants' Experience

The Situation

Leaders at a technology company with a $10 billion 401(k) plan wanted to improve employees’ experience with their 401(k).

The investment committee shared that the company was offering participants many plan choices, but most employees weren’t investment-savvy and ended up building suboptimal portfolios. The plan had 15 options, including 8 U.S. equity strategies, varying across the active/passive, value/growth and small-/ large-cap spectrums. In addition, there was a legacy balanced fund and targetdate funds that had similar investment objectives.

Instead of helping employees, the number of investment choices confused them. Spreading assets across too many different fund managers drove up fees.

Finally, the investment committee had lost confidence in some of the plan’s active managers. The plan managers were there to help participants choose between active and passive fund management, but the investment committee was now questioning the efficiency of this level of choice. The committee thought that most participants would benefit from more streamlined choices guided by professional investment experts.

About the Situation

• $10B 401(k) plan
• 15 plan options
• 8 U.S. equity strategies

The Solution

The investment committee had concerns about the current fund lineup, and worked with Aon’s Investment Consulting team to streamline the plan’s menu, to review and replace funds in which they had lost confidence, and to reduce fees. The updated menu simplifies the plan line-up to make it easier for plan participants to make smart investment decisions. Implementing this new strategy also provided an opportunity for the plan to reduce and renegotiate third party fees. The following graphic shows the changes to the plan.

Aon's Investment Consulting team helped leaders make changes to the plan options, including:

• Simplify eight U.S. equity strategies into a single, passive option. According to the committee, the average participant wasn’t interested in differentiating between multiple highly correlated types of U.S. equities.
• Merge two active non-U.S. equity options into a single, white-labeled option. The investment committee believed the funds were better paired together and professionally managed (rather than giving participants a choice).
• Add a passive non-U.S. equity option.
• Move assets from a prime money market to a stable value fund.
• Remove the balanced fund, which was viewed as redundant with the target-date funds, and map those assets into the target-date funds based on participants’ expected retirement dates.

The Result

The plan sponsor launched a simpler investment menu for its 401(k) plan with 7 investment options.

This resulted in the elimination of redundant investment strategies, with the goal of simplifying the investment options. If a participant had assets in a strategy that was removed, those assets were mapped to the corresponding replacements. For example, assets in any of the eight U.S. equity strategies were mapped to the single passive U.S. equity option in the new lineup.

The investment committee was happy with the reduced investment management fee on U.S. equity and the option to choose a low-cost non-U.S. equity option, and employee feedback was positive.

Investment management fees decreased for two reasons. First, active strategies were replaced when the investment committee did not have confidence that the managers could perform well, net of-fees. Second, reducing the number of managers allowed the plan to achieve better economies of scale with the remaining managers, who often had higher asset levels as a result of the changes. In aggregate, the plan participants achieved a 45 percent reduction in investment management fees, totaling about $12.8 million in the year after the change.

The investment committee was pleased with the reduced management fee on U.S. equity and the low-cost non-U.S. equity option. Employee feedback was positive.

The Next Steps

This project is the first in a two-step process for the plan sponsor. As a second step, the investment committee will consider the role of retirement income within their defined contribution plan. They have not yet decided if retirement income will be offered in a “retirement tier” within the core menu and/or installed within the plan’s Qualified Default Investment Alternative.

Another future step being considered is a plan “re-enrollment,” mapping all assets into the target date funds unless participants actively request otherwise. This would likely drive more participants to age-appropriate, professionally managed portfolios as the default. The plan sponsor is continuing to work with their Aon Investment Consulting team to explore these ideas that may lead to additional improvements for participant outcomes and fee savings.

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