“Plan fiduciaries need to offer participants a high-quality, multiasset default investment,” said Blanchett. “I think they have to give participants a place to go to have a one-off, easy-to-select portfolio."
The question then becomes, how do you help participants who want to create their own customized portfolios make better choices, he said.
"It’s having a larger menu—not just offering eight large-cap growth funds, but thinking about whether you’re offering enough options to truly build a diversified portfolio,” he said.
Increasing the number of funds on a plan’s investment menu from 10 to 30 would result in an average increase in holdings of about three funds per participant, and an increase in alpha of 11 basis points for self-directed participants, he said.
It’s unclear how much of the impact is due to rational choices being made by the participants, and how much could be due to “naïve diversification"—dumb luck caused by participants allocating blindly to all of the funds on their plan’s menu.
But the benefits of spreading out investments are clear, he said.
“Overdiversification is a total myth," Blanchett said. "I would be fine if someone had every fund on our plan’s menu. There would be little or no idiosyncratic risk, and not all of their portfolio would be stuck into another large-cap growth fund.”