August 15, 2012
--- Some defined
contribution participants rely on simple math when deciding how to allocate
their plan investments, research indicates. ---
This was especially true when participants were presented
with a larger number of investment menu choices. Researchers from Rutgers
University; University of Pittsburgh; University of Texas, Austin; and Boston
College found the number of participants selecting the default fund option
increased as the size of the investment menu increased, but among those who
actively selected investments, easy division was key to their decision making.
The findings suggest that while most investors want to
invest in a handful of funds, the total number they invest in may be
systematically influenced by the total number of funds offered in the plan.
Larger fund assortments may cognitively tax ordinary investors, who may then
simply decide to not only increase the number they choose for their own
portfolios, but also to divvy up their dollars evenly.
The study participants’ responses do not support the notion
that when choosing from a larger assortment, choosing more funds or evenly
allocating their dollars is motivated by the desire to create a more
“[A] practical implication of our research is to provide
insight and direction to fiduciaries responsible for designing and implementing
retirement plans in the best interest of their employees,” the researchers said.
“If fiduciaries can control which options investors consider, they can design
mutual fund assortments more optimally to increase the likelihood of
participation and the quality of decisions made.”
The research report can be downloaded here.