Many employees rely on simple math to determine how to allocate their contributions to 401(k) or defined contribution plans.
This trend grows more prevalent as more options are included in plan offerings, according to the research. Those who lack knowledge and experience about investing can become overwhelmed quickly if they have too many choices to grasp, causing them to make choices that are not in their best interest. Research from several sources agrees that the number of participants who choose the default investment option increases as the number of options grows.
For those who do not do so, the number who rely on simpler methods of splitting their funds also grows. The decision may be motivated partly by confusion, frustration and the need to make a choice rather than the desire to make the best choice.
Information of this nature may help fiduciaries and other parties involved in employee benefit plan administration, design and education. Limiting the number of options may help strengthen participation rates and assist workers in making more sound financial choices. Not all participants will react this way, but many will, particularly if they lack the knowledge to feel comfortable making an informed decision.
