The investment menu is ultimately what participants will use to grow their savings for retirement so its importance cannot be overstated. (Photo: Shutterstock)

How many decisions does the average person have to make in one day?  Getting ready for work in the morning, you turn on the television.  If you have cable, you have up to 1,000 channels to choose from.  On your way to work, you may stop at Starbucks where there are 87,000 possible drink combinations.  You arrive at your desk – do you start with voicemail or email?  Or maybe the project you left hanging yesterday afternoon?

There are many types of decisions humans are faced with in the infrastructure of our daily lives.  Estimates on the number we are faced with range anywhere from 5,000  to upwards of 30,000 decisions per day.  Over a lifetime, the average person will make over 770,00 decisions and will come to regret approximately 140,000 of them.  The larger, more imperative decisions, or the inability to make them, can have serious consequences.

Consider the current state of retirement readiness in this country.  According to the National Institute on Retirement Security, almost 40 million households have no savings at all.  The Employee Benefit Research Institute estimates that Americans have a retirement savings deficit of $4.3 trillion.

Among the many challenges facing plan sponsors today, one of the most important is participant engagement. One of the primary ways plan sponsors can increase participation in their retirement plans is to evaluate the investment menu.

The investment menu is ultimately what participants will use to grow their savings for retirement so its importance cannot be overstated.   The key to crafting a retirement plan investment menu is creating a balance between providing enough options for diversification and keeping the menu simple enough for participants to use easily. This is where choice plays a factor.

Studies have shown that too many choices in an investment menu can lead to poor diversification, procrastination, or "paralysis from analysis" – where participants will make no choice at all.  After all, they probably had to make around 2,000 choices before coming to work and being presented with information on their retirement plan.  Just thinking about making one more decision can be defeating – especially when the participant might not feel they have the expertise to make the right decision.

Utilizing an understanding of participant behavior and the daunting number of decisions facing the average human on any given day, plan sponsors should consider simplifying and designing investment menus around key objectives and organizing fund options into "tiers."

Tier 1 – Do It For Me

For the majority of participants, the thought of navigating even a simple core menu of funds can be overwhelming.

For those participants that want someone to "do it for me," it is best to guide them through the process of making an investment election based on their age or their expected date of retirement and then selecting the appropriate target date fund.

Another option is a risk-based model (i.e., conservative, moderate, aggressive).  Participants feel assured their account will be professionally managed.

The proliferation of target date fund usage over the past 10 years is a sign this tier is suitable for a large portion of the participant population.

Tier 2 – Help Me Do It

For the segment of the participant population that have the desire to spend time understanding and building their portfolio, it is a best practice to provide them with a simplified core menu of funds.

The challenge to plan sponsors is to provide enough options to deliver diversification, but also keep the menu easy enough for the average investor to understand.

A well-constructed menu might include 10 to 15 choices.

Tier 3 – Do It Myself

For some plan sponsors with seemingly sophisticated investing participants, they may want to provide additional choice.

While this isn't appealing to all plan sponsors, some find the ability to point participants to a brokerage window to purchase almost any investment option a benefit.

We find that the amount of participants that actually invest in a brokerage window is about 2 percent.

Take a streamlined approach

Our experience has shown that a streamlined approach to investment menu construction benefits both participants and plan sponsors.

Participants can focus on how much to save, which is arguably the most important determination they will make in having a successful retirement, versus combing through dozens of investment options.

Plan sponsors can also focus on monitoring the limited number of investment options and creating economies of scale to keep costs down.  Together this will create participants that are retirement ready and reduce the fiduciary liability of plan sponsors.

Cheryl Wilks is a member of Innovest's Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. Her responsibilities also include assisting in Innovest's retirement plan efforts including Request for Proposals for clients, portfolio accounting and rebalancing, and building performance reports.  Cheryl has more than 25 years of experience in the financial services Industry. Cheryl has a son who is also in the financial services industry after graduating from the University of Colorado in 2015. She is an avid skier, a huge Bronco fan, and enjoys spending time hiking with her dogs