Generally speaking, we live in a society where people value choice and the general attitude is that the more choice, the better. Thats apparent when you walk down the bread aisle in the grocery store. How many different ways can you package enriched wheat flour and high fructose corn syrup? Those commercials on TV advertising a particular phone service are funny. A guy sits around a table with a group of children and their responses are filmed after baiting them with questions like, which is better more or less? Of course the kids scream out in unison that more is better. The problem is that despite our cultural biases, more is not always better.
This is very apparent in the number of investment options offered under a retirement plan. Studies have shown that too many choices for plan participants can be overwhelming and lead to analysis paralysis. In one often cited study, the University of Pennsylvania Wharton School Pension Research Council Working Paper 2003-10, it shows declining participation rates when there are more investment option choices, with a precipitous drop in participation rates when choices number thirty or more. With too many choices, the net result is that participants make poorer choices, or simply make no choice.
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How can this be so far out of whack with the Wharton studys demonstration of significant analysis paralysis? This is due to the historical evolution of the 403(b) market. 403(b) plans began as retail individual annuity arrangements, and each employee did their own thing. Even though legislative and regulatory changes over the years have made 403(b) plans run more and more like qualified plans, an individual attitude still exists. In fact, even today there are groups are using choice as a code-word phrase for continuing to let individuals do their own thing. Even though many individuals have individual brokers and advisers to work with, there has been a dearth of advisers looking at investment offerings as a whole at plan level, and how it translates to a responsible choice for participants.
ERISA has it right. There needs to be a responsible party to review the investment options and provide a prudent line-up for participants. Clearly, there are 403(b) plans that have not done this, especially among the higher education institutions. They probably need help from the expertise of investment professionals to overcome the demands for, and cultural bias toward, more choice in favor of a better-designed plan that will provide better outcomes for participants overall.
Do you agree? Lets chat in the comments.
Friedman is the tax-exempt national practice leader with the Principal Financial Group, an investment management and retirement leader. A noted expert on 403(b) plan design, he has been consulting with tax-exempt organizations for over 20 years and has been in the retirement plan business since 1986. This blog originally ran on
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