At first glance, it appears higher total fees may present the greatest challenge when contemplating the number of options in a 401(k) menu. While this may be true (see "How Many Investment Options Should 401(k) Plan Sponsors Offer?"), evidence suggests too many options both demotivates employees and leads them to make incorrect decisions.
One of the most cited papers on this subject is was "When Choice is Demotivating: Can One Desire Too Much of a Good Thing?" by Sheena S. Iyengar and Mark R. Lepper (Journal of Personality and Social Psychology) concludes that subjects given a choice of six chocolates to choose from felt more satisfied than subjects given a choice of 30 chocolates to choose from. The study also determined choice is not bad. Both the six-chocolate subjects and the 30-chocolate subjects felt greater satisfaction than the group given a "choice" of only one chocolate.
Follow-up studies applied these same principles of choice specifically to 401(k) plans. Like the Iyengar/Lepper research, these 401(k)-specific studies conclude the fewer choices are better. As recently as August 10, 2011, David Goldreich and Hanna Haaburda wrote a paper ("When Smaller Menus Are Better: Variability in Menu-Setting Ability") that concluded, "In an important economic context 401(k) pension plans – we find that larger menus are objectively worse than smaller menus" and stated: "this results in a negative relation between menu size and menu quality: smaller menus are better than larger menus."
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