Change Is a Good Thing

Abstract

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. Disclaimer: Two of the authors’ companies offer menu services for defined-contribution plans. Editor’s note Submitted 12 June 2019 Accepted 17 September 2019 by Stephen J. Brown