August 14, 2012 (PLANSPONSOR.com) – Some defined contribution participants rely on simple math when deciding how to allocate their plan investments, research indicates.
This was especially true when participants were presented with a larger number of investment menu choices. Researchers from Rutgers University; University of Pittsburgh; University of Texas, Austin; and Boston College found the number of participants selecting the default fund option increased as the size of the investment menu increased, but among those who actively selected investments, easy division was key to their decision making.
The findings suggest that while most investors want to invest in a handful of funds, the total number they invest in may be systematically influenced by the total number of funds offered in the plan. Larger fund assortments may cognitively tax ordinary investors, who may then simply decide to not only increase the number they choose for their own portfolios, but also to divvy up their dollars evenly.
Responses to questions asked of the study participants do not support the notion that when choosing from a larger assortment, choosing more funds or evenly allocating their dollars is motivated by the desire to create a more diversified portfolio.
"[A] practical implication of our research is to provide insight and direction to fiduciaries responsible for designing and implementing retirement plans in the best interest of their employees," said the researchers. "If fiduciaries can control which options investors consider, they can design mutual fund assortments more optimally to increase the likelihood of participation and the quality of decisions made.” The research report can be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1008841.