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Multiple-Choice Problems

To encourage diversification in 401(k) plans, companies continue to add investment options, but some experts question the merit of providing lots of choices.
Alix Stuart, CFO Magazine
February 1, 2003

In an effort to encourage diversification in 401(k) plans, companies are continuing to add investment options to their menus. One-third of companies recently surveyed by Hewitt Associates say they're planning to boost the number of funds they offer this year. Lifestyle funds, fixed-income funds, and stable-value funds top the list of likely additions. But some experts are beginning to question the merit of providing lots of choices.

"It surprised us that so many were interested in adding more funds," says Hewitt consultant Lori Lucas, given that the average plan already boasts 13 funds. "After a certain point, you have to ask: Are you helping employees become more diversified or are you confusing them?"

That was the question Ford Motor Co. asked last year when it hired Morningstar Associates to take stock of its offerings, which had grown from 6 funds to 60 during the previous eight years. The result? "We slimmed down to eliminate offerings that were redundant or overly complex," says Ford spokeswoman Anne Marie Gattari. Ford ultimately reduced the total to 36.

Despite the results of the Hewitt survey, some experts expect more companies to follow Ford's lead in the coming year. "A number of companies are beginning to question whether or not they have too many funds in their plan," says David Wray, president of the Profit Sharing/ 401(k) Council of America.

When $1 billion Terra Industries Inc. switched 401(k) providers late last year, for example, it ended up slicing 4 of its 17 funds to reduce overlap. At first, the agricultural supplier considered adding funds, says Mark Rosenbury, chief administrative officer. But given the minority of employees who actively manage their funds, it made sense to simplify. "Most employees make their elections and then forget them," he says.

Indeed, piling on more funds may not influence investment behavior. "Although the number of funds offered continues to go up, it has little effect on how many funds people hold," notes Lucas. "In fact, that may even cause it to decline."




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