Theinvestment menu is ultimately what participants will use to growtheir savings for retirement so its importance cannot beoverstated. (Photo: Shutterstock)

How many decisions does the average person have to make in oneday?  Getting ready for work in the morning, you turn onthe television.  If you have cable, you have up to 1,000channels to choose from.  On your way to work, you maystop at Starbucks where there are 87,000 possible drinkcombinations.  You arrive at your desk – do you start withvoicemail or email?  Or maybe the project you left hangingyesterday afternoon?

There are many types of decisions humans are faced with in theinfrastructure of our daily lives.  Estimates on thenumber we are faced with range anywhere from 5,000  toupwards of 30,000 decisions per day.  Over a lifetime, theaverage person will make over 770,00 decisions and will come toregret approximately 140,000 of them.  The larger, moreimperative decisions, or the inability to make them, can haveserious consequences.

Consider the current state of retirement readiness in thiscountry.  According to the National Institute onRetirement Security, almost 40 million households have no savingsat all.  The Employee Benefit Research Institute estimatesthat Americans have a retirement savings deficit of $4.3trillion.

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

The investment menu is ultimately what participants will use togrow their savings for retirement so its importance cannot beoverstated.   The key to crafting a retirementplan investment menu is creating a balance between providing enoughoptions for diversification and keeping the menu simple enough forparticipants to use easily. This is where choice plays afactor.

Studies have shown that too many choices in an investment menucan lead to poor diversification, procrastination, or "paralysisfrom analysis" – where participants will make no choice atall.  After all, they probably had to make around 2,000choices before coming to work and being presented with informationon their retirement plan.  Just thinking about making onemore decision can be defeating – especially when the participantmight not feel they have the expertise to make the rightdecision.

Utilizing an understanding of participant behavior and thedaunting number of decisions facing the average human on any givenday, plan sponsors should consider simplifying and designinginvestment menus around key objectives and organizing fund optionsinto "tiers."

Tier 1 – Do It For Me

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

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

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

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

Tier 2 – Help Me Do It

For the segment of theparticipant population that have the desire to spend timeunderstanding and building their portfolio, it is a best practiceto provide them with a simplified core menu of funds.

The challenge to plan sponsors is to provide enough options todeliver diversification, but also keep the menu easy enough for theaverage 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 investingparticipants, they may want to provide additional choice.

While this isn't appealing to all plan sponsors, some find theability to point participants to a brokerage window to purchasealmost any investment option a benefit.

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

Take a streamlined approach

Our experience has shown that a streamlined approach toinvestment menu construction benefits both participants and plansponsors.

Participants can focus on how much to save, which is arguablythe most important determination they will make in having asuccessful retirement, versus combing through dozens of investmentoptions.

Plan sponsors can also focus on monitoring the limited number ofinvestment options and creating economies of scale to keep costsdown.  Together this will create participants that areretirement ready and reduce the fiduciary liability of plansponsors.

Cheryl Wilks is amember of Innovest's Retirement Plan Practice Group, aspecialized team that identifies best practices and implementsprocess improvements to maximize efficiencies for our retirementplan clients. Her responsibilities also include assisting inInnovest's retirement plan efforts including Request for Proposalsfor clients, portfolio accounting and rebalancing, and buildingperformance reports.  Cheryl has more than 25 years ofexperience in the financial services Industry. Cheryl hasa son who is also in the financial services industry aftergraduating from the University of Colorado in 2015. She is an avidskier, a huge Bronco fan, and enjoys spending time hiking with herdogs