Choice, or rather, too many. General Motors has picked up on recent academic research that indicates that having too many investment choices in a 401(k) plan can lead some participants to pick the most conservative investment option and discourage others from participating at all. GM will be paring the number of 401(k) fund options from over 80 to less than 40.
The academic research goes back to 2000 when social psychologists Sheena Iyengar, PhD, a management professor at Columbia University Business School, and Mark Lepper, PhD, a psychology professor at Stanford University, were the first to empirically demonstrate the downside of excessive choice.
Their research showed that when shoppers were given the option of choosing among smaller and larger assortments of jam, they showed more interest in the larger assortment. But when it came time to pick just one, they were 10 times more likely to make a purchase if they choose among six rather than among 24 flavors of jam.
Dr. Iyengar then sought to examine consumer choices with higher stakes. Would a greater investment in the outcome mean people would make different or better choices? To do that, she and Wei Jiang, PhD, a finance professor at Columbia Business School, analyzed the number of fund options in 401(k) plans. They found that more options led people to act like the jam buyers: the greater the number of options, the more cautious people were with their investment strategies, or didn’t participate at all.
And so what’s a plan sponsor to do then. Barry Schwartz, a professor at Swarthmore College, may provide some help. In his book, The Paradox of Choice: Why More Is Less, Professor Schwartz says that "satisficing" is the best option. In layman’s terms, that’s the first choice that fits our preference as opposed to exhaustively scanning all options until finding the perfect, or "maximizing" one.
Whether the new offshoots of the Pension Protection Acto of 2006 – target maturity funds, automatic enrollment, and investment advice – will help accomplish that remains to be seen.