Employers Keep It Simple With Fewer Choices

As part of an increasingly paternalistic approach toward employees, more companies are thinking about reducing the number of investment options in their 401(k) plans. Thirty-one percent of employers recently surveyed by Hewitt Associates said they were likely to simplify their fund selection.

Five years ago, companies were rushing to offer a greater selection of investment options in their 401(k)s to meet demands from employees who felt confident about investing on their own. Today, after three-year-plus bear market, employees are less adventurous. Employers hope that by limiting the number of options, they are making the selection process less intimidating.

“Flexibility was the buzzword of the day in the late ’90s,” says Lori Lucas, director of participant research at Hewitt Associates. “Today, participants aren’t asking for flexibility, they are asking for help.” The average number of funds in a 401(k) plan in 2003 was 14, up from 12 in 2001, according to Hewitt.

Becky Hodgin, manager of retirement services at Reynolds & Reynolds, a Kettering, Ohio-based supplier to the auto industry, is discussing dropping some underperforming funds from its 401(k) platform and has not decided if it will replace them. The company has 18 funds in its 401(k) as well as a brokerage account, up from 13 choices in 2001. It recognizes that as it has added options, it could be making the choice more difficult for employees, Hodgin says.

“I’m thinking we should make it easy,” she says. It’s hard enough to get employees to think about their retirement savings as a priority, so anything the company can do to make their decisions simpler may boost participation. More than 80 percent of Reynolds & Reynolds’ employees invest in the 401(k).

According to a recent study conducted by two Columbia Business School professors, however, the number of funds in a plan does not affect how many an employee chooses. The study, “Offering vs. Choice in 401(k) Plans: Equity Exposure and Number of Funds,” showed that whether a 401(k) plan had four or 49 funds, the median number of funds chosen by an employee ranges between three and four.

“It seems that the number of funds chosen is not connected to the number of funds offered,” says Gur Huberman, one of the authors of the report. The research did indicate, however, that for every 10 funds an employer adds to its 401(k) plan, the likeliness of participation drops between 1.5 and 2 percent.

As long as a 401(k) plan covers the major asset classes, that should be enough to satisfy employees’ needs, Lucas says. “If you have 14 funds and you are thinking about having 15, it’s likely that fund will not be a core asset class and not a suitable option for the average worker anyway,” she says.

–Jessica Marquez