Faced with a glittering array of alternatives, it seems, consumers go numb. Poring over Vanguard Group records of 647 defined-contribution plans spanning nearly 800,000 employees, Iyengar and Jiang found that for every 10 funds added to a plan’s menu, the probability that an employee will take part in a retirement savings plan drops 2 percent. Further, variety might not spice up asset-allocation strategies. The boost in funds apparently made employees more risk-averse, leading them to bump up their contributions to money-market and bond funds by five percentage points and lower their allocations to stock funds by seven to nine percentage points.
Many plan sponsors appear to be getting the message. A consensus seems to be emerging that offering about 12 to 15 core funds is more than enough, and offering “lifestyle” funds — portfolios built to establish sound investment diversification for participants of different ages — might be even better. Thinning the list of funds also eases the compliance burden. “Fulfilling your fiduciary duty can be a daunting and expensive task if you offer 200 funds,” says Susan Alford, an executive vice president in the benefits group at Aon Consulting.
Retirement experts generally discourage companies from offering brokerage accounts, which enable participants to trade individual stocks and bonds as well as a broad range of mutual funds. Tom Dunn, CFO of Southwest Power Pool Inc. in Little Rock, Arkansas, doesn’t see much benefit to balance what he considers the “tremendous risk” of investing via a brokerage account. Some participants who embark on a round of day trading “may not have the foresight to diversify their holdings,” he says. “You could have someone [in a situation in which] when they retire, they have nothing.”
While simplified investment choices can boost participation, nothing meets that goal as well as a robust employer cash or stock contribution that matches part of what the employee saves. “The existence of a match is the number-one driver for participation,” says Alford.
While there are many variations in matching formulas, an employer pay-in of 50 percent up to the first 6 percent of salary that the employee contributes is increasingly considered to be the standard. Matches should be stretched out across as big a percentage of pay as possible to encourage workers to allot higher percentages of their paychecks to their 401(k)s, says Michael Weddell, a Watson Wyatt Worldwide consultant in Detroit. For instance, 50 percent on the first 6 percent of pay is better than a full match on the first 3 percent.
Whatever the formula, some kind of match is better than none. The absence of one can convey the impression that it’s OK not to save at all, “instead of it being a necessary part of one’s retirement planning,” according to Weddell. By supplying a percentage match, an employer can cue employees about the proper level to contribute. Weddell says a 6 percent match might cause the employee to think, “It seems to me that the design of match tells me that 6 percent is the right number.”