401(k) Investment Options, Portfolio Choice and Retirement Wealth

A key issue in designing any individual accounts program is how many and what mix of investment options to provide to participants. While standard economic theory suggests that more choice is always better, this paper provides evidence from 401(k) plans that more choice does not necessarily lead to better outcomes. We first document the rapid growth in the average number of fund options, and show that this growth is dominated by actively managed equity funds. We then show that the resulting change in the mix of fund options leads to a higher average allocation of plan assets into actively managed equity funds, partly at the expense of lower cost passively managed equity funds. Indeed, as the number of actively managed equity funds in a plan increases, we show that asset-weighted average expenses of the 401(k) plan equity portfolios rise, while the asset weighted average returns of the equity portfolios fall. We discuss the implications of these findings for ultimate retirement wealth.