Investments Are Like a Box of Chocolates
Many plan sponsors struggle with deciding how many investment options to offer in their retirement plans. While people generally like to have lots of options when making other decisions, having too many investment options can potentially lead to poor decisions by plan participants. In addition, more plan investment options can increase plan costs, as well as the administrative paperwork associated with the plan.
In a study on retirement plan options, researchers concluded that it is possible to present plan participants with too many options.1 The researchers began by offering people selections of jams and chocolates. Some were offered a wide variety, while others received fewer choices. The wide variety of jams attracted more attention from people, but more people purchased jams when offered limited choices. When sampling chocolates, people enjoyed choosing from the larger selection more, but also were more dissatisfied with the choices. Those who sampled from a smaller selection were more satisfied and more likely to buy chocolates again. In other words, as the number of options increased, people became more concerned about the possibility of making the “wrong” choice–they became uncertain that they had made the best choice possible.
Chocolates and jams aren’t very big decisions, but the researchers found that these same behaviors carried over to retirement plans. They examined participation rates for 647 plans offered by the Vanguard Group, a large investment management company, covering more than 900,000 participants. They found that as plans increased the number of options they offered, employee participation decreased. In fact, for every 10 options added to the plan, participation dropped by 1.5 - 2 percent. Plans offering fewer than 10 options had significantly higher employee participation rates.
In addition, more plan options can increase costs both for participants, in the form of fees, and for plan sponsors, who may face additional administrative charges from third-party administrators for additional options. Further, auditing and other costs may increase, since the number of options could increase the time necessary to conduct audits.
It’s crucial to balance choice overload against the requirements of ERISA Section 404(c) which requires plan sponsors to have at least three diversified investment options with different risk and return characteristics.
How Stonebridge Can Help
It can be a bit overwhelming to administer a company retirement plan, given all the documentation nuances let alone the deadlines! At Stonebridge Financial Group, we work exclusively with retirement plans and can help you with everything from designing to running your plan. Delegating fiduciary responsibilities can be a great solution for plan sponsors who lack time and the knowledge of ever-changing requirements to manage a retirement plan -- it's is all we've done since our inception back in 2004! Our robust service offering starts with ERISA 3(21) and 3(38) services and is the tip of the iceberg. We are consultants that help you with every aspect of your plan:
- Plan design
- Implementing cybersecurity best practices
- Plan design including student debt benefits
- Complete IRS and CPA audit support - we have ex-auditors on staff!
- Participant 1:1 and group education
- Fee benchmarking
- Ensuring participant retirement readiness
- Consulting on financial wellness
- Committee fiduciary training
- Process creation and documentation
- Contribution match modeling
- Annual plan compliance review
We become your outsourced retirement plan officer who dives into the morass of retirement plan details and resolves issues so you don't have to!
Please click here to schedule a short call, give us a call at (855) 530-0500 x601 or email info@stonebridgefinancialgroup.com. We look forward to helping your committee successfully fulfill their fiduciary duties with ease and excellence!
1. http://www.columbia.edu/~ss957/articles/How_Much_Choice_Is_Too_Much.pdf