Many investors believe that the more choices the better. This has been proved time and again not to be true. Many participants look only at past performance to determine what to invest their 41k money in. This in most cases will lead to inferior results.

Given the fact that the decision to add more funds is made by plan fiduciaries (who are bound to act solely in the best interest of these participants) you might assume that the average participant is better off as a result.

Not so fast. If you refer to Dalbar’s annual Quantitative Analysis of Investor Behavior, you’ll see that average participant’s actual investment returns still lag market returns by 60-70+% per year. The 2011 QAIB report, for example, quotes a 20-year average equity investor’s annual return of 3.83% while the S&P 500 average return for that same period was 9.14%. These results are fairly consistent with the annual results over the past decade.

^{2011 Dalbar QAIB}

To me this means providing participants with a high-quality, diversified fund line-up is not enough. Whether it’s a lack of time, talent or interest, the average participants have not demonstrated the ability to invest appropriately on their own. Participants need tools and resources to help them make informed decisions about their retirement savings and investing. Moreover, making tools and resources available is not enough, plan fiduciaries should monitor the usage of these tools to make sure they are used appropriately and have a positive effect on participant behaviors.

This study illustrates why plan sponsors need to exclusively offer managed portfolios to their participants. Offering individual funds only confused participants and empowers them to make imprudent decisions regarding their retirement plan.

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