Less Can Be More

Here’s a saying you might hear occasionally: “Less is more.”

It can apply to many things in life. One of them, apparently, is retirement plans, and the ability to subtly encourage better decision-making by plan participants.

A new study by two professors at The Wharton School, University of Pennsylvania, delved into a case study where a retirement plan sponsor streamlined its defined contribution (DC) plan menu. Nearly half the funds were deleted, creating many fewer choices for plan participants to invest in.

What happened? Participants actually made better decisions … ones that could save them significant expense costs over time.

Their new allocations displayed “significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2 million, or in excess of $9,400 per participant,” the study stated.

In other words, when overlapping funds were eliminated from the plan menu, participants benefited. Less was indeed more.

The “whys” aren’t hard to figure. Faced with a baffling number of fund choices, plan participants can suffer “paralysis by analysis.” They over-diversify, figuring that spreading their contributions over more and more funds will create better outcomes.

In reality, the opposite is true. Fewer fund choices leads to less duplication of allocation styles, and lower expense ratios. Participants are better off.

This study should serve as a wakeup call to plan sponsors and advisors. Sponsors should review their plan, and consider the advice they’re getting from their advisor. By proactively reviewing quantitative (performance against appropriate benchmarks) and qualitative (manage tenure, style fit) data and fee structures per the Plan’s well-drafted Investment Policy Statement, this will aid in not allowing the fund lineup to have too many choices, overlapping choices, and share classes that are more expensive than what might be available.

Similarly, the level of guidance being provided to participants should be considered. They’re asked to navigate an imposing array of unfamiliar numbers and terminology. The amount of advice has to be commensurate.

A beneficial plan reform needn’t be overly costly or time-consuming. Much depends on how a sponsor goes about reviewing an existing funds lineup, and whether their advisor has experience to guide the process.

Participants should be fully informed how their existing investment allocation will be changing, and the related expense ratios involved. In the majority of cases, reforming (and simplifying) a retirement plan results in savings for them.

Simpler is better. Less is more. Timeworn notions that we’ve long believed didn’t apply to investing ... until someone dives in and explodes long-held myths. Maybe there’s something to those old sayings after all.

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