Writing specifically about new employee enrollment in retirement savings plans, Richard Thaler and Cass Sunstein in their book Nudge write, “One study finds that the more options in the plan, the lower the participation rates. This finding should not be surprising. With more options, the process becomes more confusing and difficult, and some people will refuse to chose at all.” The important lesson that Thaler and Sunstein present with this quote is that getting people to do things that they want to do and know is in their best interests is challenging, even when it shouldn’t be. Additionally, people have ideas of what they should be doing and have goals for where they want to be, but don’t often have a great sense of the best way to get there. When that is the case, such as saving enough for retirement, making the path simple is more important than ensuring that the path leads to the most optimal choice or maximizes the individual’s choices.
One size fits all approaches and solutions usually are not great. They typically get the job done, but usually don’t lead to the best outcomes for most people. This is true with health insurance plans, retirement savings accounts, and special event t-shirts. One size fits all health plans cover general health needs, but might not work well for someone who needs expensive asthma medicine. Generalized retirement savings accounts help people get started on the path to saving for retirement and ensure that people at least have something banked when they get to 65, but they often fall short and have minimal risk taking approaches that prevent losses, but limit growth. And unisex t-shirts fit everyone, but aren’t the most comfortable and certainly are not form fitting to match current fashion trends. However, despite their inadequacies, these examples are often good first steps in helping people make a decision and get started with a plan.
It would be great if every person could pick the perfect healthcare plan, could find the optimal investment strategy for retirement, and have perfectly tailored clothes for every special occasion, but it isn’t realistic everyone to make great choices in all of these situations. No one knows exactly what their healthcare demands will be for the upcoming year. Our risk tolerance and savings needs and abilities will change throughout our lifetime, and no one can mass produce special event t-shirts that are tailored to every participant. Information is lacking, preferences don’t stay the same, and resources are constrained.
Getting people (or products) started is the first step toward ensuring healthcare coverage, retirement savings, and having race-day t-shirts for a charity run. Given the constraints I mentioned above, the initial choices need to be simple. Presenting an individual with 20 healthcare plans is going to be confusing and frustrating. The same is true for retirement options, and people looking to coordinate clothing for a special event can’t spend the too much time arguing between thousands of combinatorial options for their shirts. Rather than making a selection, people risk dropping out if they face too many choices. When there are too many options, people become frustrated, and if they don’t walk away, might select the first option they see, making suboptimal choices.
A solution is to take a one size fits all approach that can be adjusted and customized at a later point. Getting people started with something simple and generalized can avoid the frustrating paralysis that presenting too many options can create. Helping people understand how to make changes and learn between selections will help people improve their decisions over time and better identify healthcare plans, retirement savings plans, and custom t-shirt options that match their needs, preferences, and constraints. It is possible to present people with a few options initially, and allow them to explore additional options later on if the initial options are not a good fit or if the individual wants to explore more nuanced and complex options.