Choosing a mutual fund in a 401(k) plan is a lot like buying jam at the grocery store, according to a documentary on PBS, “Thinking Money: The Psychology Behind Our Best and Worst Financial Decisions.”
The documentary covers all sorts of financial decisions from buying wine and jam to retirement planning.
Sheena Iyengar, the S.T. Lee professor of business in the management division of the Columbia Business School in New York, was inspired by the scene in “Moscow on the Hudson” where Robin Williams is overwhelmed buying coffee. She conducted research at a grocery store where she set out one table with 24 kinds of jam and another with six kinds. What she learned was that while the table with more jams attracted more interest, only 3% of shoppers bought from that table, whereas the table with six jams saw a 40% sales rate.
Armed with the results of her experiment, Ms. Iyengar reviewed 650 401(k) plans and discovered a similar correlation between choice and participation rates. Plans that offered five funds had an average participation rate of 72% and plans offering 40 funds had an average participation rate of 65.4%. “When people have too much choice ... people suffer,” Ms. Iyengar said.
The documentary — which also discuss issues pertinent to DC plan executives like choice architecture, default options and auto enrollment — is scheduled to air in October. Check your local listings for air time.