Saturday, November 26, 2005

Less is More

Call me old-fashioned, but at a time when it seems like everyone is advocating “automatic” solutions to get participants to do the right thing(s) about saving for retirement, I can’t help but wonder at the irony of participation solutions that don’t require a “participant” to participate.

In the second in a series, IMHO offers another non-automatic alternative to help involve and engage participants. As always, I would appreciate your reactions, comments, and suggestions.

(2) More is Less – Put that Fund Menu on a Diet

Remember the first time you walked into Starbucks looking for coffee? Well, I do – and I was awfully glad that the line was so long that I had a chance to try and figure out something to order without sounding like a total idiot. I’m sure you’ve seen those studies about participant choice and inertia – the studies about how people given 24 jellies to choose from chose to buy none, while those with a mere six flavors were significantly more likely to actually buy one.

Then there was that study by Columbia University’s Sheena Iyengar in cooperation with The Vanguard Center for Retirement Research – research that found that, on average, every additional 10 investment choices cut participation rates by 2%. Those researchers noted that, while an employee with five funds in his or her plan has a predicted participation rate of 72%, one with 35 funds in the plan has a predicted participation rate of just 67.5% (in another interesting irony, the more options, the more likely participants were to invest in company stock).

We’re never surprised when we see the results of those kinds of surveys because - whether it was that first step through the door at Starbucks, maybe that first childhood trip to Baskin-oviRobbins 31 Flavors, or maybe even the first time you made fund selections for YOUR 401(k) – we all know that it’s harder to pick from among a large number of choices than from a smaller list, and we all know that it’s even harder when the choice has a significant financial impact.

Despite that, for the past 20 years, the average 401(k) menu has steadily expanded to a point where PLANSPONSOR’s 2005 Defined Contribution Services Survey found that the average number of investment options is 19! Think about it: Think about what that means in terms of the number of prospectuses they must be given, the length of the enrollment form, the sheer amount of time that it takes a voice-response unit to repeat the choices….What has happened to your ability to discuss those kinds of fund menus in those brief enrollment meeting windows? Are all those participants unable/unwilling to get engaged in making fund choices – or, in our exuberance for beefing up fund menus, have we made the process so complicated that only a true investment geek is able – or inclined - to do so?

I realize that less isn’t necessarily more when it comes to selling your services – in fact, it will generally work to your benefit to be able to present a robust menu of choices to your plan sponsor clients, and it should. But dumping an exhaustive menu on most plan participants isn’t doing them any favors, IMHO – even with the able assistance of the best advisor in the world.

- Nevin Adams


MORE on the participant inertia study at

Too Many Fund Choices Can Drive Away Participants at

A contrary view – researchers who say the average 401(k) menu today isn’t broad enough at

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