How many funds is "too many" for a 401(k) plan? Should 401(k) plans allow trading in individual securities as well as mutual funds?
How many funds are "too many" in a 401(k) plan depends largely on the demographics of the employees covered by the plan and whether the plan is the primary source of employees' retirement savings. Many large employers with diversified workforces now offer "tiered" options: first, a set of "lifestyle" funds for employees without the financial sophistication – or desire – to develop investment portfolios on their own; second, a set of 10 or more core investment options that include at least one of each of the three traditional asset classes required by the 404(c) regulation; and third, a much broader range of mutual funds, including access to a fund supermarket, to satisfy the most sophisticated "do-it-yourselfers.". Smaller plans typically offer a much smaller menu, usually fewer than 10 funds for three reasons: the DC plan is often the only plan sponsored by the employer; the demographics of the workforce are more homogeneous; and the cost of offering a greater number of options - including the cost of employee communication and education materials – might be prohibitive for the smaller employer.
A relatively small number of 401(k) plans do allow participants to trade in individual securities as well as mutual funds. Such trading can be reasonable for a sophisticated participant who personally ensures that his or her choice of individual securities fits within a diversified overall retirement portfolio. However, if a participant puts all of his or retirement assets in one or two volatile stocks, then he or she would make an inappropriate investment for retirement.
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