Study: Pension Plans Aren't Offering Enough Investment Options

Sixty-two percent of 401(k) plans aren’t offering enough choices and also lack the correct types of funds to create a truly diversified portfolio, according to a study by Martin Gruber and Edwin Elton of NYUs Leonard N. Stern School of Business and Christopher Blake of Fordham University’s Graduate School of Business.

The cost of having inadequate investment options can be significant to participants, according to the report. The study found that participants who invested in diversified funds saw returns of 10.5%, up from 7.5% for those who did not diversify.

The NYU and Fordham authors looked at 417 plans which held publicly available mutual funds with at least five months of reported returns. In general, the larger the plan, the more options provided. The majority of plans in the study held at least six to 10 funds, while the average plan had eight investment options.

For larger employer plans – plans averaging $600 million in assets – the average number of funds offered was 14, up from 8 in 1997. Smaller plans were especially lacking in investment options, according to the study.

For a copy of the study, please see http://pages.stern.nyu.edu/~mgruber/working%20papers/adequacy_investment_choices_offered_401k.pdf .

Other studies, however, have showed that putting too many investment options on participants’ plates can simply confuse the below-average investor. One such study suggests that information overload is one reason participants in defined contribution plans often choose the default options (See One Size Fits All Approach – Doesn’t ). Another suggests that a laundry list of plan investment options may actually drive people away from joining their employer sponsored DC plan (See Report: Too Many Fund Choices Can Drive Away Participants ).