Participants Stick with a Few Funds

March 28, 2005 ( - Regardless of how many fund options are in a plan, participants are likely to only choose a few - often three or four, according to a new research report.

The study, Offering vs. Choice in 401(k) Plans: Equity Exposure and Number of Funds, by two Columbia Business School researchers, also found that many participants tend to allocate their retirement contributions evenly among the fund choices. Researchers Gur Huberman and Wei Jiang also asserted that there is little relation between the proportion of contributions which participants put into equity funds and the number of equity funds offered by the plan.

Generally, the offered fund mix and number of funds “hardly influence participants’ choices of funds,” the study asserted. “When more funds are offered, more funds go almost unused,” researchers commented.

Drilling down into the data on equity exposure, the report said that the median participant allocated 80% of his or her current contribution to equity funds excluding company stock with the average coming in at 69%. Some 34% of the participants contribute only to equity funds and 13% have no equity exposure at all.

Among new participants – those who got into their plans in 2001 – the most prevalent choice (38.6%) was a single fund, while 17.5% use two options and 15.6% have money in three investment choices. Some 64% of the two-fund participants split their assets between the funds.

“The data are consistent with a most basic form of diversification in that the contribution of a substantial number of participants are approximately evenly divided among the funds they use,” researchers commented.

The research is based on data from The Vanguard Group about 640 defined contribution plans covering 500,000 participants in which the fund lineup ranged from four to 59.

A copy of the report is here .