In fact, research by Spectrem Group shows the number of investment options in a typical 401(k) plan has more than doubled, to 16, since 1996. While this explosion of choice at first glance may make a participant’s head spin, the good news is that the number of choices used by participants has increased only modestly.

The net result of these developments is greater diversification of plan investments. This is reflected in the allocation of contributions to the plan. The percentage of assets that plan participants allocate to equity investments declined to 55% in 2005 from 70% in 2000. In the wake of the 2000-2002 bear market, it appears that participants have become somewhat more conservative with their retirement money.

Plan providers can use the annual plan review process as an opportunity to discuss investment options with plan sponsors but must be mindful that the addition of too many investment options could confuse participants.

Providers should conduct an analysis with plan sponsors to determine whether it makes sense to replace existing investment options and/or put in place a communication strategy to discuss those options with plan participants.

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