No Freedom from Choice

Are 165 options in a 401(k) too many? One plan sponsor doesn’t think so

Excerpted from Employee Benefit News, July 1999. Written by Dan Shutan.

In an information age marked by day trading and an improbable bull run on Wall Street, it’s not surprising that some retirement plan participants may be overloaded – if not overwhelmed – by 401(k) investment choices.

Question is, just how much is too much? The answer isn’t always cut and dried.

"If you look at what the average participant invests in, it’s something like 2.8 funds," says Cathy McBeen, head of the Spectrem Group’s retirement services consulting practice in Chicago.

Based on a series of focus groups with plan sponsors, she observes that once the number of investment options reaches about 12 or 15, "they feel it’s too much." Spectrem Group research shows the average number of 401(k) plan investment options has nearly doubled since 1994 to 8.4 in 1998.

After polling more than 2,000 investors between 1993 and 1997, J.P. Morgan Investment Management found that little value is placed on employers offering a voluminous number of investment options. Choice of funds ranked sixth behind the amount of an employer match, match investment restrictions, investment decision tools, investment education and source of fund information.

Unconventional wisdom?

Try telling that to employees of American Stores Co., a retail grocer and drug chain based in Salt Lake City, Utah, where 50,000 eligible 401(k) plan participants spread their dollars across 165 investment options.

Of those choices, 169 are mutual funds that have been added in recent years, while the others involve long-standing offerings of company stock and four custom funds that operate very much like a defined benefit portfolio with multiple money managers.

After surveying participants a few years ago, "it was clear to us that a significant part of our population was very satisfied with our basic custom funds and would probably stay invested in those fund offerings," recalls Scott Burgeson, the company’s senior vice president of human resources.

"We also discovered that there was a significant part of our population that was interested in more investment choices. This ran absolutely contrary to conventional wisdom in the marketplace: that people would get confused and not make good choices."…

When deciding which mutual funds to offer, "the thinking was that we’d choose 12, 15 or 20," Burgeson says. "But then we concluded, why are we doing this if we have a very clear and easy communication vehicle? Why not let participants make their own choices," especially since "there was no additional cost to offer all these funds."

… Management didn’t think the mutual funds would be so enthusiastically embraced. But within the first three weeks alone, money had been poured into about 70 of the funds.

When choices overlap

Despite this experience, there’s always a danger in spreading assets too thin across numerous fund choices, warns John Rhoads, a principal with Rhoads Grunden Lucca Capital Management in Dallas, Texas.

The economy would have to be turbo-charged for all the funds to do well, he says, arguing that mutual fund access should be limited since many large mutual fund families have an overlap in how they allocate their stock portfolios.

For younger participants who crave growth potential, "my thinking is the fewer choices the better," he says. "If you over-diversify, you lose any chance of having a significant impact on your portfolio."

But he’s also heartened that a company like American Stores would take such an approach.

"I’d rather see more choices than limited choices," explains Rhoads, who often sees old-fashioned plans with two variable and two fixed accounts. In today’s world, he says, "that’s a crime."

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For a copy of the full article, please contact RLC.    

Copyright Employee Benefit News, 1999.