Too Many Fund
Choices — Too Many Decisions
Choice isn’t necessarily the secret to employee participation in 401(k) plans.
 While the typical Defined Contribution (DC) plan offered 12 funds in 1999 — and nearly 60 percent of Vanguard’s recordkeeping plans offered more than 10 funds in 2002 — studies show most employees participate in just
three funds.
In fact, the predicted participation rate of plans with five fund options is 67.5 percent. Clearly, adding new fund options doesn’t necessarily add new plan participants.
It’s easy to see why. Most employees lack the technical knowledge or experience to make investment decisions about purchasing mutual funds. Adding more options further complicates the decision and could even prompt some employees to delay retirement plan participation altogether. Piling on investment options also means more plan reallocations and increases processing costs.
What do do? Streamline the investment menus offered in your plan to maximize participation. One possible approach is to present employees with a tiered fund menu offering a limited number of “core” choices and
focus communications around these options. A selection of 10 basic core funds could then be presented with the rest of the fund universe in an extensive fund window or self-directed brokerage option.
Since most employees aren’t highly motivated and informed financial decision makers, it’s up to plan sponsors to provide the most understandable process possible for making investment
decisions.
Source: Plan Sponsor June 2003; SHRM July 2003
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Too
Many Fund Choices, Too Many Decisions