Fewer Options = Better Investment Decisions?
Decisions, decisions. In a land of plenty, there are myriad options in almost everything. And that often includes how one’s retirement plan funds are to be invested. But a recent paper suggests that at least in that case, less may be more.
In “Simplify Menus to Meet Participant Objectives
,” American Funds Vice Presidents Toni Brown, John Doyle, Craig Duglin and Sue Walton argue that providing a high number of investment options may actually discourage plan participants from bring engaged and making good investment choices, and that a smaller menu may result in better decisions and outcomes. “Complex menus lead to participant confusion, disengagement and poor investment decisions,” they write.
Brown, Doyle, Duglin and Walton outline three steps by which they contend plans can facilitate better choices.
Offer fewer menu options. Brown, Doyle, Duglin and Walton cite research backing the notion that people in general respond better when offered a smaller array of choices than a large one, including retirement plan investment options. In fact, they posit that a large number of choices can be debilitating. “It’s not uncommon to see this paralysis in decision-making take the form of counterproductive investing behaviors like 25-year-olds investing 100% into money market funds and 65-year-olds not adjusting their 100% equity positions,” they say.
Re-label menu options. The paper argues that another way to facilitate greater engagement and better choices by plan participants is to label menu choices so they better match participants’ objectives and goals. This can be accomplished, they suggest, by grouping investment choices into categories that correspond to participants’ ages. “Such an approach makes it easier for participants to see how their investments relate to their life stage,” it says. As such, “they may be more likely to make decisions that support investment success.”
Offer broader, more flexible options. Brown, Doyle, Duglin and Walton suggest that merging investment choices into broader categories can simultaneously reduce the number of options and make the menu of choices more flexible, while still covering the same spectrum. “Participants may better resonate with their choices if the new menu options are re-labelled using the objective-based framework of ‘growth’ and ‘income’ rather than ‘equity' and ‘fixed income,’” they write.