Fewer DC investment choices equal more savingsNews added by Benefits Pro on January 5, 2016

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Joined: September 07, 2011

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By Marlene Y. Satter

It’s something marketing types have said for years: Sometimes less really is more — according to a new study.

In a paper titled “Simplifying Choices in Defined Contribution Retirement Plan Design,” Donald B. Keim, John B. Neff Professor of Finance at the Wharton School and Olivia S. Mitchell, International Foundation of Employee Benefit Plans Professor of Insurance/Risk Management & Business Economics/Policy at the Wharton School, found that reducing the number of investment options available in retirement plans not only reduced risk, but also led to greater long-term savings of nearly $10,000 per participant.

It’s no secret that, despite plan education efforts, many participants are ill informed about those options, either making poor choices or not choosing at all — which often leads to employers placing them into default investments.

Their behavior is typical of people confronted with too many options.

“Recent research in social psychology,” the two wrote, “has argued that too many choices may create confusion, resulting in poorly informed consumer decisions.”

They looked at the administrative data from a plan sponsor to see how streamlining the choices available affected the participants.

Streamlining compelled participants to “(adjust) their portfolio holdings, ending up with fewer funds, significantly lower within-fund turnover rates, and lower expense ratios,” the paper said. “Based on reasonable assumptions, these portfolio adjustments could lead to potential accumulated savings for these participants over a 20-year period of $20.2M, or more than $9,400 per participant.”

But if that wasn’t enough of an inducement to consider slimming down a plan’s investment menu, there was more: “(S)treamlined participants’ portfolios generally exhibited lower diversifiable/idiosyncratic risk and less exposure to systematic/nondiversifiable risk factors.”

Pointing out that “employers in their plan fiduciary capacity are charged under pension law with managing retirement plans in the best interests of participants,” the two concluded, “… plan sponsors would do well to recognize that the length and complexity of their plan menus matter.”

Originally posted on BenefitsPro.com
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