Iyengar, S.S., Huberman, G., & Jiang, W. (2003). How much choice is too much? Contributions to 401 (k) retirement plans. Pension Research Council working paper.
- This study’s objective was to examine whether the number of fund options offered by a 401(k) retirement plan influenced employees’ decisions to enroll in the plan.
- The authors analyzed employees’ participation rates in 401(k) plans using administrative data provided by an investment management company and regression analysis, controlling for both employee- and plan-level characteristics.
- The analysis demonstrated that as the number of fund options increased, employees became less likely to enroll in a 401(k) plan. Adding one fund to the list of investment options was associated with a decrease in participation of 0.15 to 0.20 percentage points.
- The quality of causal evidence presented in this study is low. This means that we are not confident that the increase in the number of funds offered caused the decrease in 401(k) enrollment. Other factors are likely to have contributed to the observed relationship.
The Number of Fund Choices
- 401(k) participation rates decreased as the number of fund options within a 401(k) plan increased. Across specifications, an increase of 10 funds in the number of investment options was associated with a decline in plan participation of 1.5 to 2.0 percentage points.
Considerations for Interpreting the Findings
Although the authors controlled for important characteristics at the employee and plan levels, there was no evidence that individuals who could enroll in plans that offered a different number of investment options were similar across a variety of observable and unobservable characteristics. For example, better employers might offer a 401(k) plan with a larger number of investment options. The individuals who choose to work for these companies might also be more financially savvy, leading to higher participation rates in the absence of treatment effects.
Causal Evidence Rating
The quality of causal evidence presented in this study is low. This means we are not confident that the differences in the 401(k) participation rate were the result of the differences in the number of fund options. Other factors are likely to have contributed.
Iyengar, S., Jiang, W., and Huberman, G. (2004). How much choice is too much? Contributions to 401(k) retirement plans. In O. Mitchell & S.P. Utkus (Eds.) Pension Design and Structure: Lessons from Behavioral Finance (pp. 83–95). Oxford, UK: Oxford University Press.