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I used to be a big fan of choice when it came to employee benefit plans including life insurance, health insurance and, of courses 401k investment options.
When working I crafted a plan with lots of choices. Employees said they wanted choice, it was all the rage at the time. Our unions were not so thrilled, but went along.
The unions were right and I was wrong.
People may say they want choice, but when faced with it for very important decisions, it’s not that great. It’s called the “paradox of choice.” When faced with a plethora of options, people may struggle to make a decision, and even after choosing, may experience regret or doubt.
A good example facing tens of millions of Americans is Medicare – too many choices, too much at risk making the wrong choice and limited ability to make a correction. What should be a simple decision is not and unnecessarily frightens seniors. Medicare Part C should not exist (IMO only a nod to insurance companies and costly to us all).
An even better example is your breakfast, there are now 15 flavors of Cheerios.
Is such a marketing move demand driven? The thought of taking a young child to the store to pick a cereal is really frightening- it could take days and then with regrets chococrunchveryberry was not the choice.
The benefits of choice are perceived differently than the reality. People think they are more in control, have the ability to make choices for themselves and will obtain better outcomes.
My experience says mostly that is an illusion. Having too many choices can be detrimental, and sometimes, fewer options can lead to greater satisfaction.
Our benefit plan had three standard insurance options plus several health maintenance organizations. The insurance options were identical in coverage except for varying deductibles and maximum out-of-pocket costs. The premiums reflected those differences. The higher potential OOP costs the lower the premiums. “Potential” being the key word because in the a absence of a chronic condition, most families will not reach their deductible in expenses in a given year. Nevertheless, many employees concluded that the highest cost plan provided the best coverage. Few took the time to match their fixed monthly premium costs with maximum OOP costs. If they had they would see they were likely to lose money each year.
Our 401k had seven basic funds and three pre-mixed portfolios using the seven funds. They were labeled “conservative,” “moderate” and “aggressive” to designate investment risk. They automatically rebalanced. The other choice were target date funds.
Few people took the time to understand or use the funds as intended despite extensive ongoing communications, including in-person educational sessions. Some people hedged their bet by selecting all three of the portfolios. I have a friend who’s 401k had twenty-seven investment options. He was convinced he was well diversified using five S&P 500 index funds from different investment companies.
We offered two life insurance options. One provided coverage of 1.5 times salary while working and reduced gradually to half the coverage over five years starting at age 66. The other provided twice salary while working but dropped immediately to half upon retirement. What to do, what to do? It came down to when you felt you needed the most coverage. I opted for the higher coverage while working. Most employees stuck with the higher benefit in retirement.
Choice may be desirable, but choice can be overwhelming. In my years presenting choices to thousands of workers, it was difficult to get people to do the homework required to make informed choices.
Many times especially, with health benefits, choices were made without consulting the spouse sometimes leading to loss of coverage with a long-time doctor. Other times a retiree’s survivor was shocked to learn the life insurance was not as expected and before ERISA in 1974, widows (mostly) were devastated to learn their husband chose a single life annuity pension.
These choices are significant, but perhaps not as significant as when to retire, when to begin Social Security or how to withdraw retirement funds as income.
Having choices may provide a sense of control and autonomy. However, the relationship between choice and happy results is more complex and sometimes costly.
Making choices can be – perhaps should be – hard work and effort. I’m not sure most people see it that way.
Just try to choose what Margarine you like! Agreed to many choices can be hazardous to your health. I feel that way about Medicare part C and D. People do not realize, places like Mayo Clinic do NOT take Medicare Advantage, check it out. Insurance companies have so many choices and so many annuities, no one can work through the LONG list. In may book nearly no-one needs an annuity. There are almost always better options,
It is work, but check with your sources before making important choice decisions.
The older I get, the less I like all the options and choices. For serial overthinkers like me, every decision feels excruciating – and requires way too much time and work.
After decades of wasting way too much precious life energy on unimportant decisions – especially shopping for “stuff”, I’m finally learning to pick my battles and accept “good enough” on anything that won’t impact my life in a major way.
Every year around this time I feel sorry for the Medicare retirees bombarded with the so-called choices.
And all the spam phonecalls!
So True! We are currently remodeling our bathroom and overwhelmed by DOZENS of shades of white/grey for shower tiles and flooring! Good Grief. I have no flair for design and really dislike the whole remodeling process. Too many material options makes it even worse. Thank goodness for designers.
In my volunteer role counseling on Medicare choices I have seen so many seniors confused by the ridiculous number of Advantage plans available. In addition the marketing of these plans can be deceptive and intense. The Medicare program is actually not that complicated but has been upended by the growth of Part C Advantage and so many plans that it IS confusing and difficult to understand.
“I have seen so many seniors confused by the ridiculous number of Advantage plans available.”
This is another reason to pick traditional plan with a supplement. For the most part it’s set it and forget it. You don’t have to worry about your MDs leaving the network, and then having to pick a plan they participate in only to discover that one of your other doctors does not participate in the new plan. Just set pick a supplement plan and forget it.
You still should review your prescription plan, but I think that is an easier choice. Just go to the Medicare site and put in your medications and pick the least expensive plan. With next year’s maximum out of pocket (OOP) of 2K for all plans your OOP loses are at least capped no matter which plan you choose.
Just be aware that the $2,000 cap only applies to covered drugs. The expensive drug I used to take for rheumatoid arthritis is only on the formularies for two plans this year, both with high premiums.
Excellent point!
I certainly agree with you about Medicare Advantage. I don’t remember how many choices there were in my 401k. Of course, now it’s an IRA at Vanguard I have a whole lot of choices, but I picked a very few index funds and then left them alone. I did have a little “fun” money in a REIT fund and a junk bond fund, but I just closed them out.
Generally, I think the trick is to make a choice and then stick with it unless presented with incontrovertible proof it’s not working out. Breakfast, for instance. I don’t have a problem with the cereal aisle – several years back I designed a healthy breakfast I enjoy eating, and I just eat the same thing every morning.
Problem with choices is that they are ultimately your own. There will always be people who want to be able to put the blame on others or have an automatic option to avoid making a bad decision.
But ultimately giving those who care the autonomy to make their own decisions is important. I can live with my own neglect and sub optimal decisions. When I’ve been forced into a position it is less easy when it turns out negative.
I had similar experiences as a manager. Y employer also moved to 3 health identical plans with different premiums, deductible, and maximum out of pocket costs. I developed a technique to show minimum and maximum yearly costs based on the data for that year. One thing that was a
notice able change was the outsourcing of benefits. Our HR te moved more towards workforce development and became less knowledgeable about benefits. This was especially true of retirement plans – the newer HR staff was not eligible for the pension and had no incentive to learn it. Employees turned toward management to fill in the knowledge gap. In 2014 they switched to a cash balance plan and added a lump sum option. This was never explained well, and I leaned on one my son’s college roommate who was an actuary and worked in the field. I was able to bring some clarity to the choices. I was glad I was able to help, and enjoyed the learning part.
In my experience majority of people like binary choices, but the complicated decisions are almost never binary.
Since people often prefer binary choices, the pairwise comparisons method can help with making complicated decisions. Here’s a link to a video of a straightforward example: helping a client rank five objectives in designing a water bottle. The video that follows it discusses common problems, also worth viewing.
I can tell you that there’s at least one large company that provides this kind of assistance. I didn’t really need it (my conclusions were the same) BUT it certainly made the entire exercise much easier and I use it now instead of digging around on my own.
My experiences first as a union guy and later as a registered rep parallel your own.
My wife worked for one of the largest accounting firms in the country. The firm also had their own financial advisory arm for business and high income clients. Their 401k must have had 100 or more fund choices. Having held my own security license for a while, I considered myself smarter than the average bear, and built the ultimate portfolio for her. It took me less than two years to realize my all-star selections were underperforming the pre-selected portfolios designed by the company’s advisors. In other words, I sucked.
Ditto on health insurance policies. When I became self-employed I opted for the highest possible deductibles along with an H.S.A.
I calculated that even in a worst case health scenario I would about break even considering my cumulative monthly savings. As luck would have it, I remained healthy and came out many thousands of dollars ahead.
Unlike you, I was never in a position to advise or guide employees in making such decisions. My eyes glaze over when I look at a menu at a Chinese restaurant with 127 different options. It seems reasonable for the employer to pick a sensible option, such as a target date fund as the default but allow the employee to opt out, and assemble their own portfolio from the funds available to them. When I was twenty-something, I had little knowledge or interest in long term investing for retirement and would likely have just gone with the default choice.
If you think a Chinese menu is big, try a eight page NJ diner menu😎
I agree on 401k choices. My last one offered seven very low cost options, in Roth or Traditional: S&P 500 index fund, extended market index fund, international stock index fund (developed markets, large and mid cap), bond index fund (tracking the US aggregate index), a balanced fund that combined the above, a common assets fund and company stock. Having just a few solid options probably prevented lots of dumb choices and certainly prevented wasting of time thinking about choices.