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30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances by Christine Benz

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Chapter 16. Decide between a Traditional and Roth 401(k)

I'm no retail analyst, but I think there's a logical reason why department stores like Macy's and Sears have been losing ground to specialty retailers like Williams-Sonoma and J. Crew for the past few decades. It's what behavioral finance pros call choice overload. Consumers have a dizzying array of selections for nearly every product, and that sense of having too many options can be exacerbated in department stores. Specialty retailers, by contrast, provide an edited-down menu of choices, helping ease decision making for time-pressed consumers.

A similar phenomenon exists in the realm of finance, where choice overload can lead to ill-considered decision making or, worse yet, no decision making at all. A study by the Wharton School's Pension Research Council, for example, found that 401(k) participation rates fall as the number of funds increase. A host of other studies have reached similar conclusions.

For that reason, I had a hard time getting excited about the Roth 401(k) when some companies began offering the option in 2006. I know firsthand that 401(k) participants often have a difficult time making decisions, so I was concerned that this new vehicle could further clutter their thought processes, providing yet another disincentive to save.

The jury's still out on whether this is the case, but in the meantime, I've warmed up to the Roth 401(k) as an option for certain investors, especially young people just starting out in ...

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