Are Your Fund Offerings Affecting Participation in Your Retirement Plan?

Are Your Fund Offerings Affecting Participation in Your Retirement Plan?

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

The answer is…possibly. After reading the title of this blog, you may have initially thought that eligible employees may be put off by an inadequate number of fund offerings; however, if there are too many fund offerings, some employees may become confused and, as a result, not enroll in the plan. A recent joint study by Columbia Business School and University of Chicago Booth Business School found that the more fund options an employee has to choose from, the more it deters them enrolling in the plan. Too many fund offerings also affects how participants allocate their funds.

In the study, researchers analyzed the investment fund allocations of more than 500,000 participants across 638 firms. The research indicated that with every additional 10 funds offered in a plan, the allocation to equity funds decreased by 3.28%. Also, for every 10 additional funds, there was a 2.87% point increase in the probability that participants will not allocate anything to equity funds. What does this mean? Essentially, if there are too many funds to choose from when enrolling in a plan, participants will tend to choose the simpler options, even if they have less potential.

Some third-party administrators offer an investment management and consulting service that participants can elect to join when they enroll in the Plan. The fees to participants are usually very minimal and it takes the pressure away of selecting funds if they are not comfortable doing it themselves. It may also be a good idea to consider adding target-date funds to simplify your fund offerings. Target-date funds are mutual funds that automatically reset the asset mix in their portfolio appropriate to the “targeted retirement date” of the investor. The target-date funds change their mix of funds to more conservative funds as the anticipated retirement date gets closer.  Offering this type of funds relieves some of the stress the participant might feel if it’s up to them to make these adjustments.

Joe Goodmiller