Practice Management
Well-designed restaurant menus help diners navigate potentially overwhelming options to choose the right meal for them. Similarly, retirement plan investment menus can help guide participants to choose their investments wisely. The science behind restaurant menus can offer insight into how.
Hospitality industry research shows restaurants how to organize menus toward a goal. That goal may be profitability or even conscientious or healthy eating. With subtle choices such as iconography, placement, font and daily specials, restaurants can help steer diners toward particular items, guided by science.
For instance, a 2018 eye-tracking study, “Optimization of menu-labeling formats to drive healthy dining,” found that when presenting a visual label (i.e., a physical activity-based labeling and a color-coded labeling), customers spend more time viewing menu labels associated with their final choices.
Examples of menu engineering
Menu engineering also applies to the number of options diners have. “More than seven is too many, five is optimal and three is magical,” according to menu engineer Gregg Rapp.
Streamlined menus make it easier for diners to choose — and they take less time to read.
We can learn something from this in the retirement plan industry.
Despite the popularity of target date funds as plans’ default investment option, many defined contribution (DC) participants are still “do-it-yourself” investors who pick funds off the investment menu.
With 20 fund options on an average plan’s menu, including the target date fund, this may be too much choice, and can lead to indecision.
How did DC menus get so big? The Morningstar style box, which was originally intended to be a descriptive evaluation of a managers’ investment style, has turned into something prescriptive — as building blocks for portfolios.
Checking all the style boxes is no substitute for offering a small number of well-thought-out U.S. equity menu options.
Funds with broad geographic flexibility may be used as core international/global menu offerings to simplify and direct participant choices.
One core fixed income menu option that does what it’s supposed to do without unpleasant surprises can go a long way toward providing balance in a retirement plan.
For more practice management insights for defined contribution retirement plans, go to our RP Solution Center.
Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
Although target date portfolios are managed for investors on a projected retirement date time frame, the allocation strategy does not guarantee that investors' retirement goals will be met.
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