*Three portfolios would replace 401(k) menu
*Target date funds would remain the default
*Some worry it will force active investors to pay more
By Jessica Toonkel
NEW YORK, Nov 9 (Reuters) -J.P. Morgan Asset Management is
proposing that 401(k) plans slash the number of investment
options they offer employees in favor of a new, more simplified
Currently, the average 401(k) plan has more than 18
investment options, on top of a series of target date funds, in
which they usually automatically enroll new participants,
according to McKinsey & Company.
Under J.P. Morgan's proposal, employers would still
automatically enroll new participants into a target date funds.
But rather than give those who opt out a choice of more than 18
funds, J.P. Morgan suggests providing three investment buckets:
one that invests in a diversified portfolio of equity funds,
one in bond funds and one in cash alternatives, such as stable
value funds and money market funds.
The employees could allocate their contributions across the
three portfolios as they see fit.
For example, the diversified stock portfolio would be made
up of U.S. large cap equity funds, mid-cap equity funds, small
cap, real estate investment trusts, international equity and
emerging markets equity.
"For most investors in 401(k) plans, target date funds
represent the best solution," said Michael Falcon, head of
retirement for J.P. Morgan Asset Management. "But some people
want more control, or they want to be more tactical or they
just don't understand or trust target date funds."
Participants investing in a 401(k) plan with less than
eight funds, not including target date funds, have outperformed
those choosing among more than eight funds, according to J.P.
"Many times the investment options in a 401(k) plan are
redundant or investors just don't understand them," Falcon
J.P. Morgan is discussing the proposal with advisers and
consultants of large 401(k) plans, or those with more than $1
billion in assets, and hopes to see some plans roll it out in
coming months, Falcon said.
The costs of the investment models vary depending on how
the plan sponsor puts together the buckets and what kind of
services are wanted.
Falcon declined to comment on the possible range of costs,
but he did say they would be comparable to those of a
customized target date fund.
Advisers and employers would welcome simpler 401(k) plans,
particularly given impending rules that will require plans to
disclose fees to plan participants, said Brian Ward, a Wells
Fargo adviser based in Brentwood, Tennessee, who works with
"Everyone is trying to get it where it is simpler for
employees to understand stuff," Ward said.
But making a plan simpler and doing away with choice are
two separate things, and Ward is not sure how thrilled
employees will be to see their plans get slashed -- even if it
leaves them with a better option.
"Americans like choice," he said. "It's going to take a
long time to get people to come around to this idea."
Another sticking point: It targets those who are opting out
of being automatically enrolled into a fund, yet those are the
people who will probably want to pick and choose their own
funds, said Alicia Munnell, director of the Center for
Retirement Research at Boston College.
"I really like the idea of reducing the number of options
for people, but the problem is they are reducing the options
for the people who think they want lots of options," she said.
"It's a funny mismatch."
J.P. Morgan acknowledges that there will be some plan
participants who will still want more choices. But often the
participants who are opting out of the default still only
choose two funds and never rebalance, Falcon said.
And if employers have plan participants who really want to
be active investors and choose among many options, they can
still have a self-directed brokerage account or a mutual fund
supermarket to choose from, Falcon said.
Those plan participants, however will be paying more to
access those funds through a self-directed brokerage account
than if funds were available stand-alone in the plan, said Lori
Lucas, defined contribution practice leader at Callan
For example, if participants wanted to invest in the PIMCO
Real Return Fund , they would need $1 million to
qualify for the 45 basis point institutional share class,
available to 401(k) plans. Otherwise, the cheapest share class
available would be 85 basis points, according to Morningstar
"The problem with self-directed brokerage accounts is that
it can be a very expensive way of getting access to a fund,"