Choice Overload

It has been commonly assumed in economics that more choice is a good thing for the consumer, and certainly not a negative. However, anyone who has faced row upon row of cereal choices in a supermarket aisle understands that there is such a thing as too much choice. In fact, a large array of choices can simply be overwhelming, causing Choice Overload.

In our experience, when the number of investments offered in a retirement plan increases beyond a very small number, it can have a negative effect on enrollment in the plan. In addition, those employees that do participate in the plan tend to lean toward more conservative investment choices.

An alternate explanation is that when intimidated by a long list, people opt for a rule of thumb that might be described as “go for what is psychologically easiest.” In this case, the psychologically easiest choice might be what is first on the list. Typically, what is first on the list of investment options is also the most conservative option.

Auto Invest avoids Choice Overload by offering a default one-stop, professionally managed, well-diversified investment strategy for those employees who prefer to delegate their decision to those with more expertise in the matter (i.e., the plan sponsor and advisor).

 


There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Source: Benartzi, S. (2012). Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans. Portfolio/Penguin Group Publishers.


About WFG Behavioral Finance Plan Design Investments Fiduciary Education