Don't Let Indecision Wreck Your Retirement

Years ago, I worked for a big 401(k) plan provider, working with clients on ways to raise participation in their plans. One of our ongoing frustrations was with participants -- every company had some -- who would contribute to the plan, but who would leave all their money in the money market or "stable value" option. "Why do they do this?" our clients would ask. "How can we get them to invest in stocks?"

Of course, being a big company and all, we'd done a lot of research around exactly those questions. Some were afraid of the stock market, some were just procrastinating, but a lot of them had the same answer: They couldn't decide what to invest in.

Of course, while they were struggling to decide, their retirement nest egg was earning 3% in a money market fund instead of 10% in the stock market, costing them many thousands of dollars in the long run.

This indecision's bugging me
Indecision -- or what the experts who study it call decision paralysis -- around financial choices is a well-documented phenomenon. And the more choices you have, the worse it gets: In a 1992 study, Amos Tversky of Stanford and Eldar Shafir of Princeton demonstrated that a decision to delay an action, or to take no action, becomes more likely as the number of options increases.

Back in the 1990s, retirement plan sponsors were adding options to their plans like crazy. Many plans that had 10 or 15 investment options in 1992 were up to 75 or more by the end of the decade. Participants wanted more choices, and we were determined to provide them. And for participants who took the time to educate themselves about investing, the choices were a boon.

Doing it for you
But for those less familiar with investing, the choices triggered paralysis. The industry responded with ways to make the decision easier, such as auto-enrollment. Employers like Hewlett-Packard (NYSE: HPQ), Motorola (NYSE: MOT), J.C. Penney (NYSE: JCP), and Monster Worldwide (Nasdaq: MNST) have adopted auto-enrollment to encourage better participation. Some plans have taken steps to address the too-many-choices problem as well, with many reducing their total number of options to a manageable number (usually around 30).

More recently, some employers have moved to add auto-enrollment, making lifecycle funds the default choice for the newly enrolled. In some of these plans, the whole process is automatic: Unless a new employee takes action to opt out, they find themselves enrolled in the plan, contributing enough to collect the full amount of the employer's match, and investing in a lifecycle fund with a target date close to their 65th birthday.

That's one way to get people saving for retirement. But so far, relatively few people have received this treatment. Meanwhile, thousands of retirement plan participants are still sticking with money market funds, overwhelmed by the choices available.

How to get unstuck
If you're stuck in a money market fund, or know someone who is, never fear: Here's a very simple four-step plan to get anyone unstuck. Feel free to print this out and give it to anyone you know who might need it. This plan is good for anyone who has at least 10 years left until retirement. (If you have fewer than 10 years left, skip right to Step 4 and work from there.) Here it is:

Get a list of all of the investment options in your plan. You should have received one when you were hired, or maybe when you first became eligible to enroll in the plan. If you've misplaced your copy, call your employer's benefits department and ask for another -- or ask where to find it online.Look for lifecycle funds. These funds have dates in their names, like Fidelity Freedom 2030 Fund . Find the one with the date closest to your intended retirement date. If you fall between two choices, choose the later one. If your plan doesn't have lifecycle funds -- not all plans do -- look for an index fund that seeks to match the performance of the S&P 500.Get your money in there. Call your plan's service number or log into its website (this information should be in that list of investment options) and transfer your balance into the fund you chose in Step 2. One fund is enough for now. Also opt to direct all future contributions into that fund, and make sure you're contributing enough to collect 100% of your employer's matching funds.Get yourself to Fool's School . Fool's School is the Motley Fool's easy and fun online investing tutorial. You'll learn everything you need to know to get started with investing -- it's painless and free. Once you've worked your way through it, go back to that investment options brochure, review your options, and see if you want to change your election.

That's it! Welcome to the world of the well-invested. I'll leave you with this: If you'd like more advanced advice on the best ways to save for retirement, check out the Fool's Rule Your Retirement newsletter service. It's chock-full of expert tips and ideas for maximizing your retirement savings. You can be our guest free for 30 days, with absolutely no obligation to purchase.

© 2007 Universal Press Syndicate.