404(c) Investment Selection

Are Investments Like a Box of Chocolates…Satisfying 404(c)

Trustees are the gatekeepers of the 401(k) Plan. They are entrusted with the responsibility and liability of using “care, skill and diligence” in providing the 401(k) participants with the right number and choices of investment options that will allow them to allocate their assets according to their specific investment style. The DOL has provided some relief if certain conditions are met. But how do Trustees know if they are meeting those conditions for the benefit of the participants?

It has been well documented that too many choices inside a 401(k) plan correspond with bad results. An interesting study highlighting this concept was conducted where one group of subjects was given a limited choice of six chocolates (6s), one group was given a wide array of 30 chocolates (30s), while the third group was given no choice (N.C.).

The results: it took longer for the 30s to decide what to select than it did for the 6s. The 30s felt they had “too many choices” while the 6s felt their number of options was “about right.” The 30s found their decision making more exciting yet more frustrating compared to the 6s. Finally, in terms of “buyer’s remorse,” subjects choosing from 6s were more satisfied with their decision than the 30s and both choice groups were more satisfied than the N.C. group.[1]

So how do we use this information to help guide plan sponsors to enable participants to make the right choice? We work with our clients to provide investment options that are not highly correlated but which span the spectrum of risk and reward. Ensure those options do not contain too many investments within one asset class opening participants up to exposure of selecting too many funds in one or two asset classes. We monitor the fund’s performance on an on-going basis. Then we educate, educate, and educate the participants!

If you would like to learn more about our 404(c) services, call us at 877-595-0833 or fill out the form below.

[1] “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?” by Sheena S. Iyengar and Mark R. Lepper (Journal of Personality and Social Psychology, Vol 79(6), Dec 2000, 995-1006)

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