Plan Design Enhancements Can Confuse Instead of Engage Employees

Cover of "The Paradox of Choice: Why More...
Cover of The Paradox of Choice: Why More Is Less

In my opinion the most notable and benefical design is the managed accounts for employees. This allows the plan sponsor to automatically invest employees in a risk adjusted globally diversified portfolio, based on their age. The employee can then, if they desire, opt out of the managed portfolio and choose their own fund mix. I believe most employees will remain in the managed account and will improve results.

The efforts you are putting into improving your plan may be bumping into three major obstacles: skepticism of financial institutions, the diminishing return of too many choices, and a discomfort with change, especially if you have had to make changes that weren’t positive such as passing health care cost increases on to employees or delaying raises. Here are some things to consider:

  1. Put a limit on the number of changes you make per year, along with guidelines for when changes are made. Fads come and go, and not all innovation is for the best. Many companies have a bias towards staying ahead of the curve, which is good in principle, but can get messy in practice because early adopters often make more mistakes that can end up being costly. Sometimes it’s best to wait a little while, watch the results other companies have gotten, and then take that knowledge to roll the innovation out more effectively. This strategy also has a very important benefit for employees: it gives them time to absorb the changes you do make so that they don’t become confused or overwhelmed. It also gives them confidence to know that you have a process in place to thoroughly research all new changes so that they don’t begin to distrust your motives for making change.

Adding additional options doesn’t necessarily provide results. Barry Schwartz, the author of The Paradox of Choice, talks about how our western culture is deeply embedded in the notion that having more freedom-by way of having more choices-is the best way to “maximize welfare,” but more choice actually creates confusion, and employees may end up delaying decisions or avoiding them all together. This has a direct impact on 401k plans, namely that more investment choices have been found to actually decrease participation-the opposite of what employers are looking for. A research study by Sheena Iyengar, Wei Jiang, and Gur Huberman, in partnership with Vanguard Investments, found that for every 10 investment choices offered to employees, plan participation went down about 2%. In effect, employees may be simply throwing their hands up when provided with too many choices.

Too many changes in your plan will confuse and perhaps frighten your employees. However, changes are necessary to improve the results of your company retirement plan. The reason for the plan is to provide your employees with the proper tools to retire.

PLease comment or call to discuss how this affects you and your company.

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