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Professional Advisors Sound Off on Ideal Number of 401k Plan Options

November 15
00:19 2011

(The following is the second of a three part series covering the oft-asked question: “How many options should a plan sponsor offer in its 401k plan?”)

We’ve earlier discussed the problem discovered by behavioral researchers when plan sponsors offer too many options on their 401k menu (see “How Many Investment Options Should 401k Plan Sponsors Offer?FiduciaryNews, October 263001_6439_billiard_balls_stock_xchng_royalty_free_30018, 2011). In perusing the open LinkedIn dedicated to 401k fiduciary matters, it appears many professionals understand the impact of these studies and have begun to offer practical suggestions both for their own firms as well as the industry in general. Here are some of the highlights of what they’ve said.

Colin Fitzpatrick Smith, Director of Investments at The Retirement Company, LLC of Cleveland/Akron Ohio, summarized the problem concisely. His recalls a time when his firm reviewed a 401k plan “with 26 participants with 36 choices…there was little participation in many of the investment options given the overwhelming number of choices.”

With both behavioral scientists and practitioners confirming the existence of the problem of too many 401k options, who’s most responsible for addressing it? Craig Freedman, Registered Fiduciary at 401(k) Certified Independent Investment Advisors, LLC in West Palm Beach, Florida Area says, “the one thing I strongly believe is that the change in a participants investment behavior rests on the shoulders of those in a position to affect behavioral change, i.e., the plan adviser and/or a participant level fiduciary adviser.”

The gauntlet being laid down, the question is thus put to the advisors. John O’Reilly of Comprehensive Financial Advice in the Greater San Diego Area says, “the problem is: are we talking about a typical mainstream (i.e., flawed) 401k plan that allows folks to build their own portfolio with individual funds, or a more sound, sane plan that provides only professionally designed portfolios spanning a risk continuum? If it’s the latter, I suggest 5 is a good number, but 3-8 works fine.”

Brian Douglas, Retirement Sales Consultant at Commonwealth Financial Network in the Greater Boston Area agrees with O’Reilly. “I think the ideal number is somewhere around 10, ideally I think 6, but, politically, 12 to 15 is probably more realistic,” says Douglas.

Many of the professionals commenting on the LinkedIn groups concurred. They liked the idea of plans having fewer than ten (and closer to five) options, but conceded they’re swimming upstream against a marketing current that encourages an almost unlimited choice. Still, they feel they can get their clients to accept “only” a dozen or so options.

Mark Griffith, CPC, AIFA an independent fiduciary in the greater Boston area, had the most unique response. He says, “I believe the right answer is ‘1’ (per participant). The only justifiable argument against this theory is which one. By ‘1’ I mean a properly diversified portfolio, the construction of which is certainly debatable.”

Sometimes the best things come in the smallest packages. And ‘1’ is as about as small as you can get.

Be sure to read all the informative installments of this three part series:

Part I: How Many Investment Options Should 401k Plan Sponsors Offer?
Part II: Professional Advisors Sound Off on Ideal Number of 401k Plan Options
Part III: Avoiding Decision Paralysis: How to Create the Ideal 401k Plan Option Menu

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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