Another Argument for Smaller Investment Menus

A new study offers another argument for providing plan participants with a shorter menu of investment options.

Rather than noting the confusion investors can experience when offered a wide array of investment options, the study, authored by researchers at the University of Toronto’s Rotman School of Management and the Bank of Canada, suggests a shorter menu of options is often better than a longer one because “menu-setters” who develop shorter lists have superior selection skills, on average.   

“Skilled menu-setters will put together a shorter menu because they will hit on the most important features, but less-skilled menu-setters, knowing that they’re less skilled, will put together a longer menu, just to cover all of their bases,” says David Goldreich, a  finance professor at the Rotman School who co-wrote the study with Hanna Halaburda of the Bank of Canada.  

Using mathematical models and analysis of U.S. pension plans in 2007 from 300 organizations, they found that shorter lists of available investment options proved to be of higher quality than longer ones. The researchers used a commonly-used measurement called the Sharpe ratio to evaluate the quality of the investment choices available to the organizations’ employees.  

The study will be published in a forthcoming issue of Management Science.