A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Wednesday, March 16, 2005

Can You Have Too Many Choices in a 401(k)?

According to Barry Schwartz, author of The Paradox of Choice: Why More is Less, the answer is yes. He claims that too many choices (of anything) only confuses people and either causes them to do the wrong thing or nothing at all.

One of his solutions to get people to invest in their 401(k) plan is to make a default option. In other words, sign people up in the 401(k) automatically and make them opt out if they choose. His other solution is to allow the trustee of the retirement plan to manage employer accounts. The employer simply tells the trustee the employees' ages and the trustee does the rest. I'm not so sure I like that idea. That sounds like a lawsuit waiting to happen.

I'm not so sure I'm for limiting choices either. Sure, there may be those who won't do a thing when faced with a lot of choices. But, who's to say they would do something with less choices? Maybe I'm wrong, but that's my opinion. I think financial planners need to do a better job of marketing how they help people make better decisions with their money.