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.”
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.”
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.
Demographics & Culture
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only.
American Funds Distributors, Inc., member FINRA.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.