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How to solve the biggest problem facing 401(k) plans

The average plan has 17 options. Research suggests the number should be in single digits. Believe or not, we can serve both masters.

By Chris Carosa | Updated on April 25, 2012

At first glance, it appears higher total fees may present the greatest challenge when contemplating the number of options in a 401(k) menu. While this may be true (see “How Many Investment Options Should 401(k) Plan Sponsors Offer?”), evidence suggests too many options both demotivates employees and leads them to make incorrect decisions.

One of the most cited papers on this subject is was “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?” by Sheena S. Iyengar and Mark R. Lepper (Journal of Personality and Social Psychology) concludes that subjects given a choice of six chocolates to choose from felt more satisfied than subjects given a choice of 30 chocolates to choose from. The study also determined choice is not bad. Both the six-chocolate subjects and the 30-chocolate subjects felt greater satisfaction than the group given a “choice” of only one chocolate.

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