A Paradigm Shift in Constructing 401(k) Menus

As published in the Journal of Pension Benefits Summer 2020

By Jeffery A. Acheson
Jeffery A. Acheson, CPWA®, CFP®, CPFATM, AIF®, CEPA® has
40+ years in the financial services and retirement plan industries,
creating a value proposition that is an exceptional and
diversified integration of credentialed education, experiencebased
knowledge, and industry leadership. His fiduciary based
business model focuses on enhancing his ability to be a trusted
advisor to high net worth individuals, families, businesses and
their mission critical employees, in addition to retirement plan
sponsors and their participants through his private practice,
Advanced Strategies Group. Mr. Acheson serves as the Chief
Business Development Officer for Independent Financial
Partners headquartered in Tampa, FL. He also volunteers
within the National Association of Plan Advisors having served
as the Chair of the Government Affairs Committee, a member
of its Leadership Council and as President of the organization.
He currently is an active member of the American Retirement
Association’s Board of Directors and is Chairman of NAPA’s
nonqualified plan certificate program and annual conference.

The Original Paradigm Shift

Internal Revenue Code (Code) Section 401(k) was the “loophole” that founded an industry and for me, jump-started a career. When I installed my first401(k) plan in 1982 at the embryonic stage of our industry it was funded with commissionable individual annuity contracts “for the benefit of” each participant. They were crediting 12 percent interest but imposed a 15-year surrender charge schedule that no one flinched at. The biggest battle was the paradigm shift of convincing employees why saving for their own retirement was now their primary responsibility and not their employer’s duty. My how things have changed since then! However, the question at hand is: Where do we go from here? But, before we hypothesize about the possible paths forward let’s recap how we got here, where we are now, and not only why there is room for improvement in 401(k) menu construction going forward but also why we must evolve, innovate, and execute for the benefit of all parties involved.

The Perpetual Paradigm Shift

Over the years, the evolution of 401(k) menus migrated from that sole fixed annuity approach through which I was introduced to the industry, to a plethora of alternatives dependent on the service provider and its proprietary or associated recordkeeping functionality. As interest rates came down and new players entered the competitive fray, the industry rolled out individual combination annuities offering both a fixed account and a short menu of variable subaccounts (still with inherent surrender charges), group variable annuities, mutual funds with both front-end load imposed and waived sales charges, or in some cases for the marketing enlightened, mutual funds with no front-end loads but early redemption charges applicable to each and every purchase. To complicate matters more, the creation of the Vanguard 500 Index fund on August 3, 1976, introduced the concept of indexing into the menu construction equation, leading to the ongoing debate about passive versus active management in terms of performance, cost, and risk. As time progressed it has become a byzantine myriad of options, investment strategies, and pricing models arguably only decipherable to the most astute professionals. This led to the current top-down focus on the three Fs—Funds, Fees and Fiduciary Services—whether applied by a plan’s investment committee or inherent in a retirement plan service provider’s business model. Despite this complexity, an enormous positive outcome was realized. Trillions upon trillions of dollars were accumulated from scratch in 401(k) plans and the IRA rollovers funded from them upon employee terminations and retirements. It is this end-result that will drive the eventual paradigm shift to come. In the future, as in the past, our menu construction efforts will still need to offer options for growth focused accumulation, but our efforts will need to evolve to include a greater emphasis on exploring and offering protected accumulation and managed income strategies given the growing trillions of dollars predominately in the hands of older workers and retirees.

The Commoditization of Best Practices

For the most part, menu construction over the last 10 years has been built on the thesis there are arguably three mutually exclusive groups of 401(k) participants:

  1. The “Do It for Me” Disengaged Investor,
  2. The “Do It with Me” Engaged Investor, and
  3. The “Do It Myself” Proactive Investor.

The “Do It for Me” group is perceived as the largest group. To address both the varying asset allocation needs and behavioral finance attributes of these three groups, menu construction has universally evolved into a three-tier approach of:

  1. A suite of Target Date Funds (TDF),
  2. A core menu of asset class specific funds and at times, corresponding risk-based asset allocation models, and
  3. Supplemental and expanded choices available via a self-directed brokerage account (SDBA).

It is important to note that in concert with this commoditization of menu construction has come beneficial consistency in the investment options that were missing in the early days of 401(k) plans. This commoditization has led to better \ fee benchmarking capabilities, which in turn has driven fee compression, which ultimately is in the participants’ best interest. When combined with legislatively enabled innovations such as auto-enrollment, auto-escalation, and qualified default investment alternatives (QDIA) fiduciary protections, millions of participants have been well-served and are arguably better off than they would have been if they had been left to their own devices. But, where do we go from here?

The Next Paradigm Shift

So, what does an expanded perspective of menu construction look like compared to current best practices and why is it needed? Embedded in these primary questions are secondary questions of what are we trying to accomplish and how do we go about it? One perspective as to the “why” that I have great affinity with can be found in a whitepaper authored by key retirement plan strategists within Franklin Templeton in November 2017 entitled, “The Anchor Leg of a DC Plan: Helping Participants Finish Strong with a “Retirement Tier.” The thesis of the whitepaper
argued a new fourth tier should be added to the current three-tier approach to menu construction. This fourth tier would be the “Retirement Tier” and would focus on the unique asset allocation needs and behavioral finance attributes of those quickly approaching retirement and those who already have. While no specific age range was outlined in the whitepaper, I would suggest the group would primarily be those active participants and retirees between ages 50 and 85. The what, who, and how of adding this fourth non-mutually exclusive tier could be summarized by
a simplified view within the following chart with the bottom two entries profiling the suggested Fourth Tier.

ObjectiveTargeted CohortSolution(s)
Growth Accumulation< Age 50TDFs – Core Menu – SDBA
Protected AccumulationAge 50 to RetirementPersonalized Managed Accounts
Protected DistributionRetirement to MortalityPersonalized Managed Accounts and Lifetime Income Annuities

Here We Go Again

But, let me digress to the “why” and in real time. 2020 has once again imposed a financial crisis on the investment markets that has temporarily roiled retirement plans, psyches, and expectations of 401(k) participants and retirees alike, just as it did during the 2000–2002 and 2008–2009 investment market downturns. Were the proposed “Retirement Tier” participants any more prepared or educated this time around? How will the additional scar tissue of this year’s Black Swan event affect and perhaps compound their future loss aversion proclivity? If this loss aversion mindset prevails, how will their account balances first, recover back to their former high-water marks and secondly, sustain retirement income in the low to no interest rate environment that lies ahead, at least for some time to come? Bottom line, this is no time for emotional and ill-prepared amateurs to manage investments, and that is exactly what we are asking dazed and confused participants and retirees to do in a very complex investment environment. This assessment begs the question: Isn’t that what the target date funds are supposed to address, even for the Retirement Tier? Let me answer the question with a question. How will a TDF with a near term or already realized target date heavily weighted to bonds and cash recover and sustain from here? I don’t like the answer, do you?

Tier Four Execution

Successful outcomes realized by adding Tier Four capabilities must entail a multifaceted approach incorporating the following:

  • Ubiquitous, comprehensive and holistic “opt-in” financial wellness technology and tools;
  • Acceptance by advisors of fiduciary duty at the participant level to allow for the delivery of personalized advice;
  • Targeted participant communications driven by artificial intelligence and data mining provided by the recordkeepers;
  • Innovative and portable managed account and longevity insurance options; and
  • Plan design changes acting in concert with integrated service model ecosystems better facilitating “through” not just “to” retirement planning continuity .

While multifaceted in successful execution, the heart of Tier Four success and satisfaction ultimately will be rooted in innovative investment options beginning with development of next generation managed account capabilities that incorporate all the best the investment management
industry has to offer . They can’t simply be opaque, over-priced TDFs with a few personalized tweaks trying to drive positive alpha and manage downside beta solely through static age-based allocations and the performance of the underlying
fund components.

Next generation managed accounts, some of which already are on the horizon, will attempt to offer personalized and dynamic investment paths for different and specific goals that go beyond just retirement accumulation and income. Best in breed will incorporate:

  • Individualized strategies driven by personal preference, holistic perspective, current circumstance assessment and volatility tolerance;
  • An evolved integration of active, passive, and alternative investment components;
  • A flexible combination and interaction of both strategic and dynamic asset allocation decisions that proactively adapt to changing economic and investment environments;
  • Alpha realization and downside beta management driven by both the underlying investment components and the allocation strategies themselves; and
  • Benchmarking success based on achieving probability-driven targeted returns being realized while staying within historical standard deviation parameters acceptable to the individual investor.

Thinking Outside the Box

Some ascribe to the philosophy that success often approach would be to “look outside the industry” for success elsewhere that can be studied and emulated by the near 29 trillion-dollar retirement plan industry. Perhaps we should look no further than the success Amazon has had since it was founded by Jeff Bezos in 1995 and assess its path to success. While many factors have contributed to Amazon’s success, I would suggest the following attributes have been executed brilliantly and could very well help our industry also “C” our way to even greater success in improving the retirement security of working Americans:

• Choice
• Customization
• Cost


It is said that “nature hates a vacuum” and, unfortunately at times, the world also applies the philosophy of—What have you done for me lately?—in judging business relationships. As an industry, we have done a yeoman’s job of helping 401(k) participants accumulate trillions of dollars from scratch for their future financial security. But we can’t rest on our laurels as there is a void, so we must do more, and we must do more NOW or someone else will! This latest financial downturn will once again turn the spotlight back on every aspect of 401(k) menu construction philosophy extending to scrutiny of what actionable advice was delivered during the crisis and what were the realized outcomes at the participant level. Let’s be proactive in vision, innovative in execution, and strive to improve our respective value propositions to both plan sponsors and participants. The post-COVID 19 environment will provide new opportunities for engaged conversations with both Plan Sponsors and participants about how to use the nw lessons learned, both positive and negative, to build and use stronger and ultimately more effective 401(k) menus going forward.■

Copyright © 2020 CCH Incorporated. All Rights Reserved.
Reprinted from Journal of Pension Benefits, Summer 2020, Volume 27, Number 4, pages 49–52, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437 www.WoltersKluwerLR.com