The dual concepts choice architecture and overload in behavioral economics dictate less is more; that offering too many options results in a “paralysis of analysis” that often leads to the easiest—but not necessarily the best—decision on the part of the individual. It’s something that held true for plan participants in the adoption and allocation decisions they made, or so we thought.
It turns out that more is more.
Past studies have found that smaller core menus improve participation rates and reduce choice overload, but a new white paper from Morningstar Investment Management, published Tuesday, concluded that plan sponsors should be doing the opposite.
In a new era with widespread adoption of automatic enrollment and default options, when it comes to DC plans, it turns out a bigger lineup is actually better.
The paper from David Blanchett, head of retirement research at Morningstar, examined 500 defined contribution (DC) plans with approximately a half-million participants.
Findings
It shows larger lineups offer the best of both worlds:
- Increasing core menu size results increased adoption of the plan default investment, increasing from approximately 74% for plans with 10 funds in the core menu to approximately 87% for plans with 30 funds in the core menu.
- Participants in plans with larger core menus who built their own portfolios had more efficient portfolios, primarily because they used more funds. The average number of funds for participants self-directing their accounts was 4.4 in plans with 10 funds in the core menu, but 8.6 funds for plans with 30 funds in the core menu.
- It’s important for plan sponsors and their advisors to consider revisiting their core menu design and rethink how it can be used to nudge participants toward better investment outcomes. While bigger menus might not work for all plans, the role of the core menu is changing, and perspectives on how to optimize it need to evolve as well.