Employers eye returns in 401(k)s

Retirement plan participants aren't the only ones looking to juice returns.

A recent research brief from the Center for Retirement Research at Boston College showed that 401(k) plan sponsors have an eye on fund performance when the time comes to update their plan menu options.

Researchers Edwin J. Elton and Martin J. Gruber, both professors emeritus at New York University's Leonard N. Stern School of Business, along with Christopher R. Blake, a professor of finance at Fordham University, examined 43 plans with an average asset size of $310 million between 1994 and 1999.

CHANGES TO MENUS

Over that period, the trio analyzed the changes the employers made to their menus. The plan sponsors added a total of 215 mutual funds and dropped 45.

More than half the additions were of funds from an investment category that wasn't previously represented in the plan's menu.

The research also showed that the newly added funds had particularly strong performance in the three years leading up to the change in the 401(k) menu. Indeed, the performance of the newly added funds beat a randomly selected group of similar funds by 134 basis points annually.

Funds that were dropped from plans' menus, meanwhile, underperformed a random group of similar funds by 143 basis points annually.

The boost in returns from plan menu changes was only temporary, however.

According to the research, three years after they were added, the new funds beat a random group of similar offerings only by 44 basis points. Dropped funds, on the other hand, experienced a slight improvement in their performance after being removed from the 401(k) menus, besting similar randomly selected funds by 17 basis points.

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