Capital Ideas^™ 
Investment insights from Capital Group

Retirement choice: It all started with jam.

One day, shoppers at an upscale food market saw a display table with two dozen varieties of gourmet jam. On another day, shoppers saw a similar table — except only six varieties were on display. Behind the scenes, Ivy League researchers watched.

It came as no surprise to see more customers flock to the larger display, gravitating to the intriguing smorgasbord of options and flavors. What shocked the researchers, and the academic world since, was that when the time came for people to actually buy, those who saw the smaller display were 10 times more likely to purchase jam than those who saw the larger one.

The outcome of the experiment, conducted in 2000 by Columbia University professor Sheena Iyengar and Stanford University’s Mark Lepper, flew in the face of prevailing conventional wisdom that more options lead to more engagement. The results were as clear as they were surprising: more choice isn’t always better.

Curious to see if the seemingly irrational behavior applied to heftier decision-making, Iyengar and her colleagues turned their eyes to retirement. They reviewed 650 company 401(k) plans and the behavior of nearly 800,000 employees. Each company studied was providing its employees with at least a 50-cent match for every dollar invested in its retirement savings program. Again, Iyengar found the same results: the more options a retirement plan offered, the fewer employees participated in those plans — even if it meant foregoing employer contributions.

People are “burdened by the responsibility of distinguishing good from bad decisions,” she and Lepper wrote about their jam study findings. “Having unlimited options, then, can lead people to be more dissatisfied with the choices they make.”

Too much choice leads to dissatisfaction.

Classical economic theory assumes people are rational consumers, making logical choices. Psychologists have held up the idea of choice over the years as a good thing that gives customers a sense of personal control. But behavioral economics has exposed a kink in those arguments.

With so many options to choose from, people find it difficult to choose at all. And when they do choose, they feel overwhelmed and less satisfied with their selection. Social scientists and economists have dubbed this the “paradox of choice.”

At a time when the proliferation of choice has given consumers more financial options — from choosing a 401(k) to selecting a long-term insurance policy — these findings have huge implications for investors and financial service professionals.

“If too much choice is reducing the number of people who take part in the retirement plan, or some other financial service that they can benefit from, then everyone has a problem,” said John Doyle, a senior vice president of defined contribution at Capital Group. “You can’t reap any benefit if the amount of choice you have is keeping you from participating at all.”

How to put it into practice

The main challenge is convincing consumers that having fewer options can in fact be better for them. But it is possible.

Companies such as Apple and Google actually credit much of their success to this concept. They say getting rid of clutter and focusing on simpler interfaces, fewer options and features helps customers get what they really want. For the financial services industry, that means carefully designing options and fewer, easier-to-understand menu choices to encourage better decision-making.

For example, it may make sense to relabel investing options by dividing a retirement plan menu into investment objectives that reflect the participants’ years to retirement, or investment options organized around life stages. When organized this way, concerns about risk preference and volatility can be viewed in a palatable way.

But key to this approach is first knowing what options are right for a client, said Doyle.

“If you are going to convince them that it’s OK to limit choice, you have to be able to demonstrate that you can deliver,” he said.

The bottom line: if financial professionals can find the right balance between choice and simplicity, then they may find the recipe for success. It worked for jam.