So, how many options should a 401(k) plan have? While academics suggest single digits, professionals debate this issue fervently (see "Professional Advisors Sound Off on Ideal Number of 401(k) Plan Options"). They point out the political reality of offering more than the optimal number of choices. Indeed, the 2011 Annual Plan Sponsor Council of America Survey shows the average 401(k) plan has 17 options, perhaps two or three times more than academic research suggests is the ideal number of choices. 

Fortunately, there's a way to both follow the lead of the academics while ceding to the sometimes political reality that demands a wider than necessary variety of choices. We can summarize this research in the following manner: 

• Subjects with fewer choices are more satisfied and less regretful and, as a result, are more willing to continue "playing the game."
• Subjects with too many choices ultimately suffer a "tyranny of choice," a fundamentally disheartening and demotivating phenomenon.

What we're looking for is a "minty fresh" solution. In fact, an old breath mint commercial gives us a hint to our solution. Cert's used to run an ad with the tag-line "Two mints in one." In our case, we're going to use four "mints" in one plan.

With this ammunition, we can create a new kind of structure for a 401(k) plan option menu that addresses both fiduciary concerns and behavioral concerns. It involves the creation of categories (or "tiers" as presented in "How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans" by Sheena S. Iyengar, Wei Jiang and Gur Huberman, Pension Research Council Working Paper). 

The suggestion is to use 4 categories, each addressing a different type of investor with a different willingness regarding the amount of time they'd like to spend trying to make their 401(k) choice. Here are five steps 401(k) plan sponsors can take to create this ideal menu: 

• Step One: Think like plan investors. What general investment questions do they most often ask?
• Step Two: Based on these answers, create up to four different categories.
• Step Three: For each category, come up with a practical yes/no question (preferably in hierarchical form).
• Step Four: With each category, select a limited number of options (1-5 funds).
• Step Five: Incorporate these categories in all plan documentation and educational materials. 

The beauty of this solution is it requires only two decision and at no point does the participant have more than five choices. For one real-life example of using this method in real like, read "Avoiding Decision Paralysis: How to Create the Ideal 401(k) Plan Option Menu."