Plan Format and Participation in 401(k) Plans: The Moderating Role of Investor Knowledge

Abstract

There is continuing concern that many people are not saving enough for retirement. The authors conduct three studies to determine whether simple alterations to the format of 401(k) plans can increase plan participation rates, especially among people with low levels of financial knowledge. In Study 1, offering a larger number of funds for investment reduces plan participation among low-knowledge investors, unless the plan also offers a target retirement date (i.e., life-cycle fund) option. In Study 2, the authors find those with low knowledge are more likely to participate if the funds offered for investment are grouped by asset class rather than listed alphabetically. In Study 3, the authors find that participation increases when fund descriptions include star ratings (but not fund style boxes). They also find that star ratings increase decision satisfaction among low-knowledge investors because of a reduction in perceived task difficulty. Limitations, implications, and further research are discussed.