Asset Allocation and Information Overload

We periodically post articles by leading academics in the field of behavioral finance. It is a part of our work to support research into the financial behavior of employees in participant-directed plans. In addition, we support research at UCLA by Dr. Shlomo Benartzi, who is one of the best-known academics in the country in the field of behavioral finance.

We have posted an article on our website entitled "Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice and Investor Experience." The authors are Julie Agnew and Lisa R. Szykman, who are on the faculty of William and Mary.

In their article, the authors evaluated information overload about investments in participant-directed retirement plans. In two experiments, participants were given information on six investment options and information on 60 investment options. In both cases, the participants were tested on information overload. The more knowledgeable participants experienced information overload when the number choices increased from six to 60. However, the less knowledgeable participants experienced a high degree of information overload with both six and sixty alternatives. In other words, the half of the participants with lower investment knowledge were overwhelmed with six investment options.

This study can be found on our website at http://www.reish.com/publications/pdf/wp_2004-15.pdf.

As this article suggests, fiduciaries should consider offering a limited number of quality investment options to the participants--and then undertake to provide the supporting education and services that allows the participants to utilize those investments successfully. ERISA contemplates that participants will combine mutual funds of different types into well-balanced portfolios into their accounts. The number of investment options, the quality of the investment education, and the other supporting services can determine whether the participants are successful or not.

Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.