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Do DC plan sponsors add value by monitoring and refreshing the menu of investments offered to participants? The authors find evidence that they do, particularly by successfully removing underperforming funds.


Overview

Do DC plan sponsors add value by monitoring and refreshing the menu of investments offered to participants? The authors find evidence that they do, particularly by successfully removing underperforming funds. Empirical research offers little evidence that monitoring defined-contribution menus adds value, despite the time, effort, and resources spent by plan sponsors on such activities. Using a unique longitudinal dataset of plan menus from January 2010 to November 2018 that included 4,215 fund replacements, we found that the replacement fund outperformed the replaced fund over future one-year and three-year periods. The outperformance remained even after we controlled for various fund characteristics and risk factors. It can be attributed primarily to the subsequent underperformance of replaced funds and to the lower expense ratios of the replacements.

About the Author(s)

David M. Blanchett PhD, CFP, CFA

David Blanchett, CFP, CFA, is the head of retirement research for Morningstar Investment Management. He provides research support for the group’s consulting and investment management activities, primarily in the areas of financial planning, tax planning, annuities, and retirement plans. Mr. Blanchett also serves as chairman of the advice methodologies investment subcommittee. He holds a bachelor's degree in finance and economics from the University of Kentucky, a master's degree in financial services from The American College, and a master's degree in business administration from the University of Chicago Booth School of Business.

Michael S. Finke PhD

Michael Finke is professor and director of retirement planning and living in the personal financial planning department at Texas Tech University. Previously, he served as editor of the Journal of Personal Finance, and he is currently a contributing editor to Research Magazine. Professor Finke received the Montgomery-Warschauer Award from the Journal of Financial Planning. He holds a doctorate in consumer economics from the Ohio State University and a doctorate in finance from the University of Missouri.

James A. Licato

James A. Licato is vice president of Product Management at Morningstar Investment Management LLC, Chicago, Illinois.