Morrin, M., Broniarczyk, S. & Inman, J. J. (2008), Saving for Retirement: The Effects of Fund Assortment Size and Investor Knowledge on Asset Allocation Strategies, The Journal of Consumer Affairs, 42(2), 206-222.
Brief Description: We conducted a decision simulation among 211 adults whose task was to invest in a hypothetical 401(k) retirement plan. We varied the number of mutual funds (3 or 21) offered for investment and assessed investor knowledge with a self-report measure. The results indicate that less (but not more) knowledgeable investors change their asset allocations as a function of fund assortment size. Specifically, the proportion of dollars allocated to the riskier asset class of stocks (versus bonds or cash) more than doubled for the less knowledgeable investors choosing from the larger assortment.
Implications: Our results suggest that substantive aspects of portfolios of investors with lower levels of financial literacy may be subject to menu effects of 401(k) plans. While it is not necessarily undesirable for investors to allocate more of their dollars to stocks, it is disconcerting that merely changing the number of funds offered in a plan can have such a large impact on the risk profile of investment portfolios. To minimize such effects, investors may want to formulate an allocation strategy (i.e., decide roughly the proportion of dollars they plan to invest in each of the major asset classes) before they examine the choices actually offered in their 401(k) plan.