Balancing Choice Overload for Your Company’s Retirement Plan

By: Joe Dillon, CFP®
2 Minute Read

Many retirement plan sponsors struggle to determine the “right” number of investment options to offer their employees.

While we live in an era of choice, where people expect to see multiple options before making decisions, having too many retirement plan options can lead to poor investment results.

In addition, increasing the number of plan options can increase plan costs and administrative paperwork.

A Study on Choice

In a well-known study on retirement plan options, researchers concluded that it’s possible to present plan participants with too many options.

The researchers began by offering people selections of jams and chocolates. Some were offered a wide variety, while others received fewer choices. The wide variety of jams attracted more attention from people, but more people purchased jams when offered limited choices.

When sampling chocolates, people enjoyed choosing from the larger selection more but were also more dissatisfied with the choices. Those who sampled from a smaller selection were more satisfied and more likely to buy chocolates again.

In other words, as the number of options increased, people became more concerned by the possibility of making the “wrong” choice. They became uncertain that they had made the best choice possible.

Selecting chocolates and jams aren’t life-changing decisions, but the researchers found that these same behaviors carried over to retirement plans. They examined participation rates for 647 plans offered by the Vanguard Group, a large investment management company, covering more than 900,000 participants.

They found that as plans increased the number of options they offered, employee participation decreased.

The Takeaway for Your Company’s Retirement Plan

The above study also found that for every 10 options added to the plan, participation dropped by approximately 2 percent. Plans offering fewer than 10 options had significantly higher employee participation rates.

In addition, more plan options can increase costs for both participants, in the form of fees, and for plan sponsors, who may face additional administrative charges from third-party administrators. Furthermore, auditing and other costs may increase, since the number of options could increase the time necessary to conduct audits.

Finding the Right Mix of Investment Options

It’s important to balance choice overload against the requirements of ERISA Section 404(c), which requires plan sponsors to have at least three diversified investment options with different risk and return characteristics.

Curi members and clients looking for recommendations on investment managers and investment plan options are encouraged to reach out to the Curi Capital team at 984-202-2800.

Joe Dillon, CFP®

Joe Dillon is Curi Capital’s Managing Director of Retirement Plan Solutions, based in Raleigh, NC.

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