Choice in Retirement Plans: How Participant Behavior Differs in Plans Offering Advice, Managed Accounts, and Target-Date Investments
8 Pages Posted: 22 Apr 2009
Date Written: April 21, 2009
Research has shown that too many choices can lead to choice overload, causing people to disengage from making any decision at all. Otherwise put: Too many choices can be bad - especially in the context of retirement planning decisions. In such cases, less can literally equate to more. T. Rowe Price, in conjunction with choice expert Professor Sheena Iyengar of Columbia University, examines how participant behavior differs based on the services and investment options that plans offer. Specifically, participant behavior is analyzed in over 110 401(k) plans recordkept by T. Rowe Price. Plans are of all different sizes and offer a combination of Advice and Managed Account (MAs) services, as well as Target-Date Investment (TDI) options. Some plans included all three offerings, while other plans included only one or two. Different combinations of plan offerings are evaluated with regard to whether or not they:
• Impact employees’ tendency to participate
• Affect participants’ likelihood of using a particular offering
• Alter participants’ deferral rates
• Change asset allocation mixes of participants
Here is what the research shows:
Offering TDIs may positively impact participation. Plans that offer TDIs appear to have higher participation rates than those that do not offer TDIs.
Some choice is good for participation. Plans that offer one of the two services in combination with TDIs see a boost in enrollment relative to plans that offer TDIs alone.
More choice does not guarantee increased participation. Plans offering two services in combination with TDIs have similar participation rates relative to plans that offer only TDIs. In fact, for plans that automatically enroll employees into a TDI, offering two services is associated with lower levels of participation relative to offering neither service in conjunction with the TDI default.
Usage of TDIs is high. When TDIs are offered as part of a plan, TDI usage for participating employees is about 70%. TDI usage is even higher when employees are automatically enrolled in a TDI.
Usage rates for particular services and investment options are not cannibalized when offered together in one plan. Plans that offer only services, only investment options, or both have similar service and investment option usage rates.
Deferral rates are similar regardless of the combination of services or investment options a plan offers. Plans that make one or all offerings available to participants - Advice, MAs, and/or TDIs - do not show different rates of saving.
Asset allocation to stocks and bonds is higher in plans that offer TDIs. Plans that offer TDIs alone, or in conjunction with services, have stock allocations at least 15 percentage points higher and bond allocations at least three percentage points higher than plans that do not offer TDIs.
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