When 401(k) plans were introduced in the early 1980s, most had only one-to-three funds available. Typically, participants would find a low-income/low-risk fund (often called a “guaranteed” investment vehicle) and an employer stock fund.
As the plans became more popular, the U.S. Department of Labor (DOL) determined that plan sponsors had to offer more options that enabled participants to minimize risk, not to mention mitigate their own fiduciary risk. However, at the same time, the DOL didn’t give any direction on how many funds were sufficient enough to offer. In response, plan sponsors began offering more and more funds.
But did opening up these choices make plan participants happy? Did it make them more likely to want to participate or invest more? Turns out it did not.
While it is clearly not the only driver influencing plan participation, a recent study of over 650 plans representing over 1,000,000 potential plan participants found the number of funds offered had an inverse relation to participation. When comparing plans with one fund to 59 funds, it was determined that for every 10 funds offered, people were two percent less likely to participate.
Plans with one-to-five funds averaged approximately 73% participation, while plans with 55 funds or more only averaged 63% participation. This fund overload issue not only affected whether employees chose to participate, but also the fund selection process. Investors with many fund options shied away from stock funds and leaned towards money market vehicles at a much higher rate.
The way in which plans are currently constructed and positioned often deters employees from making selections, and ultimately drives them to make poor decisions.
If choice is so important for investors, why are they choosing not to choose?
The piece above is an excerpt from a new guide, in which we discuss the issues that stem from offering clients too many choices, as well as several concrete steps that can be taken to address them. You can download it here.