Here's the skinny. I've written about the problem of choice overload and the detrimental effect it has on 401(k) plans (see, "4 Proven Strategies to Reduce Choice Overload in 401(k) Plans," FiduciaryNews.com, June 4, 2013). Behavioral finance has been a "hobby" of mine ever since I started my own firm in the mid-1990s. I like it because it's true. It's true when it comes to picking stocks. It's true when it comes to buying mutual funds. And it's especially true when designing 401(k) plan investment menu options.
But before I get into that, here's the real problem with choice overload – it can be the reason why a 401(k) plan fails its annual nondiscrimination test. And of all the reasons to fail, this is perhaps the dumbest. Choice overload is the easiest problem to fix. As the name implies, it's caused by there being too many choices for the participant to process. Instead of making a decision on which fund or many funds to pick, the employee makes an even easier decision – the employee chooses not to participant. Nonparticipation has the beauty of allowing the employee to avoid all those nasty decisions and to go on living life to the extreme.
Unfortunately, as we all know, nonparticipation has a dark side for the plan sponsor. It increases the likelihood of failing the nondiscrimination test. It also increases the likelihood the participant will never be able to retire, but, hey, what does he care?
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
