Study: Too Many Choices Impair 401(k) Decisions

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Since the 401(k) plan is no longer a supplement to the pension plan and the sole source of retirement, managed portfolios are the answer. These must not be an alternative but rather the sole choice for participants. This would be a return to a ‘pension fund’ type of retirement plan.

Too many options, the researchersfound, can impair a person’s ability to make reasoned choices.In the first study, one group was asked to pick a gamble from the menu of 11 gambles, which includes ten risky options and one less lucrative, and less risky, gamble of five dollars. Another group was offered three gambles, which included the less lucrative gamble of five dollars. The researchers found that many more subjects chose the simple option from the set with 11 options than from the set with three.

In another study, this one related to 401(k) plans, the researchers tested whether the number of funds offered influences asset allocation. Using data from the Vanguard Center for Retirement Research, the researchers analyzed the investment decisions of over 500,000 employees in 638 firms. The study found that with every additional ten funds in a plan, allocation to equity funds decreased by 3.28 percentage points. Meanwhile, for every ten additional funds, there was a 2.87 percentage point increase in the probability that participants will allocate nothing to equity funds.

“As revealed in the first two studies, the presence of complicated choices caused decision-makers to choose the simpler options, even if they were not as lucrative,” the study reported.

The next generation retirement plan will provide managed portfolios only. The participant will choose the appropriate risk level and adjust only as their situation changes.

Please comment or call to discuss how this can affect you and your company.

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