Sheena Iyengar

“How Much Choice Is Too Much? Determinants of Individual Contributions in 401K Retirement Plans”

Editors: O. S. Mitchell and S. P. Utkus

Abstract:
Recent field and laboratory studies have shown that, although extensive choice is initially appealing, it may hinder motivation to buy and decrease subsequent satisfaction with purchased goods. The following investigation examines whether these findings generalize to employees who are making decisions about whether to invest in 401(k) retirement savings plans. Using data from nearly 800,000 employees of 647 plans in 69 industries in the year 2001, obtained from the Vanguard Center for Retirement Research, we tested the hypothesis that as the number of fund options increase, employee 401(k) participation rates decrease. Results support this hypothesis - employee participation in 401(k) plans show significant drops when comparing participation rates in plans offering a handful of funds as compared to plans offering ten or more options.

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