The Effects of Choice Proliferation on Retirement Savings Behavior

Sheena S. Iyengar
Professor of Management
Columbia University, Graduate School of Business
TIAA-CREF Institute Fellow

May 2008 |

Increasing the number of options available to an individual is generally seen as beneficial. However, sufficiently large choice sets can also cause individuals to focus on all the things that can go wrong, lose the ability to distinguish between options, and otherwise negatively impact the choosing process.

Research has found a negative effect of the number of offered funds on 401(k) participation rates. Further analysis has revealed that as the number of funds rises, participants become more likely to avoid stocks in favor of money market and bond funds. Additionally, employees do not take advantage of a higher number of options. It appears likely that when faced with a large number of funds, the majority of which are specialized stock funds, employees are drawn to the (seemingly) simpler bonds and money markets, even when they yield lower returns.

Ongoing research suggests that “tiering” an investment menu—e.g. initially presenting employees with a subset of general-purpose options while giving them the ability to see the full fund list if they desire—could make the choice seem less overwhelming to novice investors while still offering experienced investors the ability to take advantage of a rich set of options.

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017