New 401(k) Math: More Options Decreased Participation Employee Benefit News (07/03) Vol. 17, No. 8 p.33; Blassingame, Kelley M.
Seventy percent of plan sponsors offer 10 or more mutual fund choices, according to a survey conducted by the Profit Sharing/401(k) Council of America. However, such variety often leads to decreased participation from investors. That theory was proven after Columbia University assistant professor Sheena Iyengar analyzed about 793,000 workers in 647 retirement plans and determined that when just two funds are offered participation rates peaked at 75 percent but when more funds are offered that peak drops to 60 percent. Although Americans demand choice, human nature tends to lean toward what is least complicated, explains behaviorist Gary Selnow. The solution to keep participation rates strong is, perhaps, to offer automatic enrollment along with a mixture of stock and fixed-income funds. Then maintenance of the portfolio is done through auto rebalance without the participation of employees. A number of companies are offering portfolios that automatically rebalance after a certain period of time. The notion of auto rebalancing is so new that response is still unknown. A demand for such a product exists, and making the option known will begin with online education. The product will remove responsibility of 401(k) performance from employers and make plan sponsors responsible for rebalancing the portfolios to provide the owners with the highest value.