Having many options to choose from can be a good thing but for capital accumulation plan members, being able to choose from a wide variety of investment options can be a bad thing.
“Too much investor choice leads to investor overload,” said Nadia Savva, an account executive for Manulife’s group savings and retirement solutions division, at the ACPM seminar in Toronto this morning.
Choice can be overwhelming for most plan members. A study—conducted by Sheena S. Iyengar and Wei Jiang of Columbia University—of nearly 800,000 employees eligible for employer contributions into a DC-type retirement plan found that participation rates fell when employees were given more options.
The participation rate fell to 70% from 75% when the number of fund choices increased to 11 from two. When there are between 11 and 30 choices, the participation probability is relatively constant. But, the downward trend continues when more than 30 funds are offered and the participation rate falls to 61% when 59 options are available.
The same study also showed that for every 10 additional funds offered to plan members, allocations to money market funds increased by 4%, allocations to money market and bond funds combined increased by about 5.4% while allocations to equity funds fell 7%.
To avoid such problems, Savva recommends that plan sponsors make it simple for novice investors by offering asset allocation funds and retirement date funds. They should also offer diversification opportunities, but limit choice to a manageable set of core options.
Plan sponsors should also stay away from choice overload and avoid offering specialty funds, such as science and technology or precious metals. “It’s not about the quantity of funds,” she said, “it’s the quality.”
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