More choices may not improve outcomes

We tend to believe that more choice is better, but too much choice can bring unintended negative consequences.

Indeed, too much choice may be hampering important decisions related to retirement investments. A plan participant survey from 2024 found that six out of 10 defined contribution (DC) plan participants wished they could just push a button and completely hand over retirement planning and investing to a professional.¹ Adding to the evidence that participants may be overwhelmed, only 22% of sponsors state that they were extremely confident that the majority of their participants had an appropriate asset allocation.²

Fortunately, plan sponsors have already been responding to the shift in participant preferences by starting to simplify their menu offerings: the 2023 survey found that more than a third of sponsors have reduced the number of fund options on their plans’ investment menus in the past three years.²

Complacency increases the risk of allocation drift

As US plan sponsors seek ways to simplify their menu choices, US equity offerings will be an important focus. The asset class is often a participant’s largest allocation—typically 50% of a 60/40 stock-bond portfolio—and many plans feature a dizzying array of options: core, growth, value, large cap and small cap and via multiple managers.

However, choice overload can lead to plan participant complacency, which may put their investments at risk. A study done by the Plan Sponsor Council of America found that over half of plan sponsors said their employees made less than a 5% change to their investment options.³ Without rebalancing, plan participants subject themselves to portfolio drift risk—when market returns lead asset allocations away from their targets.

For example, if a participant split the U.S. equity portion of their portfolio evenly between a growth and a value strategy five years ago and did not rebalance, it is likely that the growth allocation would have increased to 57% while the value portion declined to 43% (Exhibit 1). The investor would be more exposed to U.S. growth than five years ago, especially relative to value, and meaningfully increased risk in the portfolio. Maintaining the risk/reward balance in your retirement savings portfolio requires rebalancing when your allocation has drifted.

Pure core strategies take less risk than growth, value options

The reason many investors use a combination of value and growth strategies in the first place is to approximate a core equity allocation. However, in addition to the risk of allocation drift, growth and value managers appear to take more risk to achieve their returns than a genuine core equity manager. Our research over one, three, five and 10 years reveals that the median tracking error for growth and value managers is more than their core peers, meaning they generally take more risk to outperform their respective benchmarks (Exhibit 2). With median tracking error figures suggesting more inadvertent risk in growth and value strategies compared to core, simplified menus that offer core strategies instead of growth and value, could benefit participants by reducing unnecessary choices and unintended risk. 

Even within the Large Cap Core category, investment styles and processes can lead portfolios to drift from core into growth or value. This is especially true for Large Cap Blend managers that create a core portfolio by combining separate value and growth sleeves. Since 2019, the median Large Cap Blend manager has generally stayed within the core category as defined by Morningstar. However, on average, a quarter of the Large Cap Blend category has deviated into either value or growth (Exhibit 3).

For plan sponsors looking to simplify retirement plan options, offering a true core strategy may improve the participant experience and investment outcome. A core strategy offers similar characteristics and returns to a combination of large cap growth and value, but reduces risk in three ways:

• Plan participants avoid having to choose between growth and value, eliminating the risk of allocation drift or having to actively rebalance
• A median Core strategy appears to take less risk, as measured by tracking error, compared to value or growth strategies 
• A genuine core strategy has the ability to avoid style drift into growth or value

JPMorgan Large Cap Core Strategy: More core, less risk

The JPMorgan Large Cap Core Strategy is a high-conviction portfolio, that balances the best of growth and value exposure in a style-pure solution. We incorporate careful risk management through stock selection that deliberately minimizes macro and style risk and drift using our global research platform and 37-year-old research process. Importantly, our Large Cap Core Strategy has generated top-decile, risk-adjusted returns while taking less risk than 87% of its peers (as measured by tracking error).*