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How to narrow choices without slashing options

Studies prove giving 401(k) plan participants too many choices leads to bad outcomes.

By Christopher Carosa | Updated on June 01, 2012

Since 2000, there’ve been at least five academic studies in behavioral finance that prove giving 401(k) plan participants too many choices leads to bad outcomes. Too much choice can both “demotivate” them and lead them to make poorer long-term investment decisions. In fact, a study released late last year concluded “we find that larger menus are objectively worse than smaller menus.”

Academic evidence suggests a 401(k) plan should have anywhere from three and, perhaps, nine choices. Any practitioner, however, will tell you corporate politics can often generate dozens of options. Here’s a simple way to satisfy both the ivy tower and the board room—place mutual fund options in distinct “decision-style” categories. Before they consider any investment options, have employees first identify the appropriate category they should choose from.

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Christopher Carosa

Christopher Carosa

Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).

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