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Is the Conventional Wisdom About Lineup Size Still Correct?

A new Morningstar paper questions the status quo.

A fascinating new paper by Morningstar's head of retirement research, David Blanchett, along with Professor Michael Finke, upends conventional wisdom on how retirement plan menus should be structured, but it also offers some useful insights about the behavior and performance of individual investors in those retirement plans that we can all take some lessons from.

As I noted in my very first column looking at how many funds one really needs in a portfolio, experts have generally advised against creating retirement-plan lineups and individual portfolios overloaded with too many funds. A number of reasons underlie that advice, but one of the chief rationales (particularly for retirement plans) is that too many options leads to "choice overload." That's the situation in which participants, overwhelmed with the number of options before them, decide to take the route of doling out their allocations equally across all the plan options--or worse, to not participate in the plan at all.