Perspectives : DC Retirement | February 09, 2024

Benchmarking the active fund tier in DC plans

Originally published January 23, 2024
For many retirement plan participants, target-date funds (TDFs) have become the investment of choice. As reported in Vanguard’s How America Saves 2023, 96% of Vanguard’s defined contribution (DC) retire­­ment plans offered TDFs at year-end 2022. Among plans choosing a qualified default investment alternative (QDIA), 98% of the QDIAs were TDFs. Fifty-nine percent of participants had their entire account invested in one TDF.1

Offering a core of index funds is another recent development in the design of DC plan investment lineups. In our definition, an index core, at a minimum, consists of options covering U.S. equities, non-U.S. equities, U.S. taxable bonds, and cash. In 2022, 69% of Vanguard plans offered at least four options within an index core, and 68% of participants had access to both an index core and TDFs.2

But most DC plans offer more than just TDFs and other index funds in their investment lineups. Many participants want to add actively managed funds to their portfolios, so most plan sponsors and consultants have included a supplemental layer of active funds. Ninety percent of plans offered large-cap active funds in 2022, for example, and 80% offered active bond funds.3

Choosing the right mix of active funds

DC plans that add active funds to their investment lineup should make sure that the active tier meets a key objective: Participants should have sufficient options to choose from to build diversified portfolios, either by themselves or with the help of a managed account provider. Broad diversification can keep plan participants from having too much exposure to the worst-performing areas of the market in the event of a downturn.4

By analyzing the data on DC plans’ active fund tiers, we found that some plans have gaps. Our analysis can help plan sponsors and the consultants who work with them benchmark and enhance their fund lineups to meet their objectives and close those gaps.

Active equity funds

As shown in Figure 1, we’ve determined the median number of active equity funds that plans offer by broad market category by mapping each active fund to its respective Morningstar category. The results show that some plans still offer separate growth and value funds, as opposed to blended funds. Offering a blended fund frees participants from having to decide how to allocate growth and value in their portfolios. But plan sponsors (at least at the median) still appear to want to offer their participants choice by providing both growth and value funds, which might help to satisfy investment-savvy participants who have a strong preference for one style over the other.

We also found that some plans offer more active equity large-cap funds than small-cap or value funds, and more domestic funds than international funds. “Offering more domestic than international funds isn’t surprising,” says Michelle Liu, Vanguard investment product strategy manager. “We often see home bias in investor portfolios as well. But markets outside the U.S. don't always rise and fall at the same time as the U.S. markets, so owning both international and U.S. securities can help level out the volatility in a participant’s portfolio.”

Figure 1: Median number of active equity funds in plan lineups by broad category exposure

Source: Vanguard calculations as of December 2023.
Figure 2 shows how often funds within specific Morningstar categories are offered. Active large value funds tend to be offered more frequently than large blended or large growth funds, while growth seems to dominate on the small cap and international side. “This finding surprised us,” Michelle says, “because the CRSP US Large Cap Growth Index outperformed the CRSP US Small Cap Growth Index by almost 8% during the five years leading up to December 31, 2021.”

Figure 2: Number of active equity funds offered within select Morningstar categories

Source: Vanguard calculations as of December 2023.

Active fixed income funds

When it comes to active fixed income, plan investment lineups seem more streamlined. Intermediate core-plus, as Figure 3 shows, is the category offered most often, which seems prudent given that strategy’s diversified nature. A stand-alone active inflation-protected bond fund is the second-most frequently offered category. “That makes sense,” Michelle says, “given the prevalence of inflation-protected bond allocations in TDFs, which are typically plans’ QDIAs.”

Figure 3: Number of active fixed income funds offered within select Morningstar categories

Source: Vanguard calculations as of December 2023.

Some plans offer a higher-risk fixed income option in high-yield funds, but plan sponsors and consultants could consider emerging markets bond as an alternative to high yield. Only 1% of plans offered emerging markets bond funds5 (perhaps because U.S. investors are more familiar with U.S. markets than with international markets), although the risk-adjusted return profile of high-yield and emerging markets bond funds is similar.

In addition, Michelle says, “Emerging markets debt is significantly more diversified than it’s ever been.” A more diversified issuer base translates into less idiosyncratic risk and more active management opportunities.6


A thorough analysis of How America Saves 2023 data on the active portion of DC plan lineups reveals that some active fund offerings may be tilted—perhaps unwittingly—toward particular styles, regions, or market caps. Specifically, we’ve discovered that, on the actively managed equity side, plans tend to offer:  

  • Growth and value funds, but no blended fund.

  • More large-cap than small-cap funds.

  • Insufficient international options.

  • Too many large value funds and not enough large blended and large growth funds.

On the active fixed income side, plans might want to consider supplementing or replacing high-yield funds with emerging market funds. The risk-adjusted return profile of high-yield and emerging markets bond funds is similar, and emerging markets debt is more diversified than ever.

Have questions about how to construct your plan’s investment lineup? Our Investment Solutions team can help you achieve the right balance.       

1 How America Saves 2023, p. 11. Vanguard, 2023.
2 How America Saves 2023, p. 63. Vanguard, 2023.
3 How America Saves 2023, p. 68. Vanguard, 2023.
4 “Discipline May Be Your Best Defense in Market Downturns.” Vanguard, March 2022.
5 How America Saves 2023, p. 61. Vanguard, 2023.
6 Dan Shaykevich, “Why We’re Bullish on Emerging Markets Debt,” p. 3. Vanguard, July 2022.
7 How America Saves 2023, p. 60. Vanguard, 2023.


  • All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
  • Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date. 
  • Investments in bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
  • High-yield bonds generally have medium- and lower-range credit-quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit-quality ratings.
Michelle Liu
Investment Product
Strategy Manager