My father was one of the great freshwater fishermen. He knew all of the flies, hooks and lures, the best spots in the lake, and the optimal weather conditions to catch trout, bass, walleye, and pike.

I remember a hot Saturday when I was 16. We had a big catch that day, and it took us a while to clean them. After a shower, I came down to find Dad sitting at the kitchen table drinking a cold Coke. He had a big pile of papers spread out over the table and floor. He seemed anxious and frustrated as he sorted through them.

It turns out that Dad was trying to make a decision about his 401(k) plan investment selections and was facing a complicated menu of investment options. My father, who worked a factory line for a living, didn’t know the difference between a stock and a bond. He didn’t understand the investment jargon in the materials he was reading, and it put him at a severe disadvantage. The menu was not suited to his level of sophistication about investing. His knowledge of investing was as small as his knowledge of fishing was vast.

Since I had completed one high school business course, my father asked me for help with the investment papers. I didn’t have a clue how to advise him, but I gave it my best shot. We made our way through the materials and picked several funds for his portfolio.

My father’s story illustrates that his circumstances warranted a certain approach by the plan sponsor. For him, investing was a stressful and confusing subject. We’ll never know how the portfolio would have fared because my father passed away when I was 18. What I didn’t know then, but know now, is that effective menu design can drive effective outcomes for plan participants.

Consequences of complexity

We’ve seen DC menus evolve over time. Early 401(k) participants, like my dad, were presented with a variety of funds, often arranged alphabetically, each accompanied by an old-style prospectus. There were numerous options, and they were not arranged to facilitate optimal decision-making. As a result, participants were often paralyzed by complexity.

Next, the industry started arranging the funds by asset class or risk profile—money market/stable value, then bonds, U.S. stock, and then international stock. Plan sponsors began to understand that the way we categorize options impacts participant decision-making. We can communicate information and even guide participant choices by the way we frame them.

Today, more attention is being given to behavioral finance when it comes to menu design. Like my dad, participants vary in the amount of involvement they want to have in their investment selection. We’ve learned that we need to structure the investment options in a way that allows people to have the amount of control that they want.

Create a tiered lineup.

No matter if you’re a small business owner with 100 employees or a multinational Fortune 500 enterprise, we recommend that you incorporate the behavioral principle of framing through a tiered menu format. By taking a “choice architecture” approach, a plan’s investment options are organized into logical groups. This arrangement helps participants better manage the complexity of choices offered while also reflecting the sponsor’s own investment philosophy.


We recommend using three tiers.

Tier I features the plan’s single-fund options, which will include the plan’s qualified default investment alternative (QDIA,) which is most often a target-date fund (TDF). TDFs provide the ability to choose a single portfolio based on expected retirement age. They offer a streamlined choice rooted in professional investment management. We call this the “Do it for me” option.

 Tier II contains the building blocks of broadly diversified funds. Often these are the individual index funds that make up the TDF. We call this the “Help me do it” scenario.

 Tier III holds the supplemental investments, which may include sub-asset classes and alternatives. We call this the “Let me do it” option.

I can’t go back and have that conversation with my father, but I can urge plan sponsors to make the right choices so their participants don’t have to struggle the way that he did. We need to break out of the mentality that because participants bear the investment risk, we can only try to equip them to make the right decisions. In actuality, we are empowered to make decisions as plan sponsors that can set many more participants up for retirement success than they ever could themselves.

My father went into a money market and a smattering of several funds with strong trailing returns. How was that for a retirement plan? Not appropriate at all. How many moms and dads in the 1980s and ‘90s selected money market/stable value funds as primary vehicles for their retirement investment and then stayed in them for decades?

Plan sponsor-driven choices can lead to great outcomes for participants. It doesn’t have to happen at the kitchen table anymore, and you don’t have to teach them which lure to use. If that plan had a default investment and auto features back then, my dad wouldn’t have needed to look to his 16-year-old son for help. That’s a problem. And, yes, I wish I could have told him at 16 what I’ve since learned. Now it’s up to us to make sure all participants get what they need to succeed.

Whether you’re validating your Tier I TDF option, trying to evaluate suitable Tier III supplemental funds, or just trying to better understand menu tiering for your plan, Vanguard’s Defined Contribution Advisory Services (DCAS) can help.

For additional information:

Constructing a defined contribution lineup: Four best practices



All investing is subject to risk, including the possible loss of the money you invest.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Foreign investing involves additional risks including currency fluctuations and political uncertainty.