Paradox of choice. What to do, what to do?

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.