A long-standing tenet of behavioral finance is that more choice doesn’t lead to better decisions. So what’s with those burgeoning 401(k) investment menus?
Roughly a quarter (27%) of plan sponsors have reduced the number of investment options over the past two years, with an additional 4% indicating a plan to reduce the number of investment options offered to participants in the future. Of course, that means 69% haven’t made any move in that direction.
Plan sponsors tend to offer more than 11 investment options in their DC plans, with 38% offering 11 to 15 options and 45% offering more than 16 options, according to the Rocaton/Pensions & Investments 2015 Survey of Defined Contribution Viewpoints, which polled more than 400 plan sponsors and other industry professionals. The latter group tends to suggest fewer investment options, with 43% arguing for 10 or fewer fund options, though 38% suggest 11 to 15 investment options.
However, the survey found that the level of interest in significant streamlining (a movement to only three or four total investment options) was 42% (though still less than half) when including those that are somewhat or very interested and those that say they have already implemented streamlining. The survey’s authors note that that is somewhat consistent with 2012 survey results, although the percentage that are not interested at all has increased by 10% (to 22%). The interest level was significantly stronger among plans with less than $1 billion in assets.
All in all, it seems that most plan sponsors are at least open to the notion of reducing their investment menus — but are unlikely to make substantive moves in that direction in the short term.
