More Choice Not Necessarily Best within Retirement Plans

Aug 14, 2012, 09:07 ET from American Marketing Association

CHICAGO, Aug. 14, 2012 /PRNewswire-USNewswire/ -- Employers may think that offering lots of retirement fund options is helpful, but new research shows that ordinary investors are overwhelmed by too much choice. In response, they go with simplified diversification strategies and end up with portfolios that aren't as diversified as they appear.

A team of researchers at Rutgers, the University of Pittsburgh, the University of Texas, and Boston College tested how fund assortment size affects investor behavior. They found that when given lots of choices, people tend to spread their money evenly across the funds they choose. They conclude that people act this way because they are mentally drained by the process of choosing funds and this allocation approach seems like an easy way to meet the conventional wisdom of a diversified portfolio.

The analysis appears in the August issue of the American Marketing Association's Journal of Marketing Research. The researchers conducted experiments to show that increasing fund assortment size increases the number of funds that people invest in, and also increases their tendency to spread the dollars evenly among their chosen funds. As a result, people aren't as diversified as they think, increasing their exposure to market swings.

"The research shows that people get overwhelmed by choice. It is one thing to be faced with a big assortment of mustards at the grocery store, where the stakes are low. The order of magnitude is greater with mutual funds, where you feel less informed," says J. Jeffrey Inman, Albert Wesley Frey Professor of Marketing and associate dean for research and faculty at the University of Pittsburgh. He is a co-author of "Investing for Retirement: The Moderating Effect of Fund Assortment Size of the 1/N Heuristic," along with Maureen Morrin, professor of marketing, at the Rutgers University School of Business; Susan M. Broniarczyk, Sam Barshop Centennial Professor in Marketing Administration at the University of Texas-Austin McCombs School of Business; and Gergana Nenkov, associate professor of marketing, and Jonathan Reuter, assistant professor of finance, both of the Boston College Carroll School of Management.

The findings have implications for human resources officers, fiduciaries of defined benefit plans, and financial services plans. Researchers say that marketers of financial products should do a better job of easing the decision process for investors, especially for those with limited investment knowledge or training. Making the task of investing for retirement simpler and less intimidating may increase employee participation and savings rates, helping to ensure a safer and happier future for retirees.

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