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So many choices: What to do? What to do?
Updated: 2006-01-17 15:57

Dozens of drug-prescription plans. More than 8,000 mutual funds. Fixed-rate, interest-only and option ARM mortgages. Regular 401(k) plans vs. Roth 401(k)s. Countless flavors of bank accounts.

Choice is a hallmark of capitalism, and most of us would agree that having too many choices is far better than having no choices. A growing body of research, though, shows Americans have become so besieged by choices that many feel paralyzed and confused. (Advice: Tips on making smart choices)

Having to choose one brand of jam out of 20 brands is one thing. But as Americans bear more responsibility for their own financial lives - from drug coverage to retirement savings - their decisions are looming larger than ever. At stake: their retirement, their health care and their children's education.

The problem is that many of us aren't up to making such decisions, says Barry Schwartz, a psychology professor at Swarthmore College and author of The Paradox of Choice: Why More Is Less.

"This is just not a world for amateurs," Schwartz says. "The stakes are higher for things like health care and retirement plans than jeans or cereal."

The latest example: the Medicare prescription drug plan, which offers seniors in some states 50 or more plan options. Some seniors could save hundreds of dollars a year by signing up for the new benefit. And if they fail to join by May 15, they'll pay higher premiums in 2007.

Yet according to a November survey by the Kaiser Family Foundation, 37% of seniors don't plan to enroll in the plan. An additional 43% said they weren't sure.

Bill Bennett, 82, of Tacoma, Wash., says he could probably save money by signing up for the drug benefit because his current drug coverage through a Medigap plan is costly. But after trying to navigate the program, he gave up. He says it was "just impossible" to screen all the options and see which offered the best coverage.

The Medicare drug plan reflects a deeply held belief that choice is good, and that more choice is better, Schwartz says.

The problem with that idea, he says, is it's "empirically wrong." Faced with choice overload, people typically respond in one of three ways, Schwartz says. We freeze and make no choice. We make the wrong choice. Or we make the right choice but question our decision. "Even though you have no reason to be displeased, you're just sure you could have done better," Schwartz says.

Other areas where we risk choice overload:


About 70% of workers contributed to 401(k) plans in 2004, according to Hewitt Associates. But among workers younger than 30, only 46% participated, Hewitt says. And just as traditional pensions are vanishing, most Americans are saving far too little to maintain their standard of living in retirement. The average 401(k) balance was $69,000 in 2004, Hewitt says.

Economists offer many reasons for America's low savings rate, but an overabundance of choices is seen as one key factor. A study by Sheena Iyengar and Wei Jiang, professors at Columbia Business School, found that as companies increased the options in 401(k) plans, participation actually fell.

Participation starts to drop after companies offer more than nine or 10 funds, Iyengar says. The average 401(k) plan offers 14 funds, according to Hewitt.

And as the number of funds rises, workers are more likely to invest in money market funds or other options that might be too conservative, Iyengar says. Those types of funds are low risk but provide low returns over time, raising the likelihood that workers won't have enough money for retirement.

And starting this year, some workers will have yet another choice: the Roth 401(k) plan. The Roth 401(k),being offered by some companies,resembles a traditional 401(k). But contributions are made in after-tax dollars. This new savings plan could benefit workers who expect their tax rate to rise in retirement, because they won't pay taxes on withdrawals. Still, "There's a great concern that people will be paralyzed by the choice," says Chris Bowman of Principal Financial.

Bill Janin, a manager for DaimlerChrysler in Baton Rouge, says his company's 401(k) plan offers 36 funds. He invests in 13 of the funds and also manages his wife's 401(k). "It's constant maintenance," Janin says. "This is not something anybody prepared me for."


State-run college 529 savings plans let parents and other family members save up to $500,000 for their children's college education. Withdrawals are tax free as long as the money is used for college expenses. And many states offer tax breaks for residents. Yet about only one-third of parents who are saving for college have invested in a 529 or other tax-advantaged plan, a 2004 survey conducted for Fidelity Investments found.

Parents interested in opening 529 plans have no shortage of choices - and they don't have to invest in their own state's plan to get the federal tax benefits. That may be part of the problem. The popular website SavingforCollege.com, a clearinghouse for information about 529 plans, lists 126 state-run plans. Arizona offers seven 529 plans. Oregon offers four.

Parents can also choose from several other college savings vehicles, including Coverdell education savings accounts and Uniform Gifts to Minors Act accounts.

Rich Towler, 38, a company manager in Holly Springs, N.C., has set up an education savings account for his two children, ages 9 and 5. He's looked into 529 savings plans but hasn't invested in one "because I don't know which one is better."

Towler is also saving for retirement and trying to help his father, a retiree, pick a Medicare drug plan. "The difference between our generation and ... our parents is it seems the responsibility is being shifted to us, but so is the burden," Towler said in an e-mail.


Not long ago, most home loans were 30-year fixed-rate mortgages. We focused mainly on finding one with the lowest rate.

But years of low interest rates, rising home values and record homeownership have spawned a variety of new products. The options range from hybrid adjustable-rate mortgages to piggyback loans. Borrowers also have a wide choice of lenders.

Andy Block (no relation), 24, of San Francisco, says he was "overwhelmed" by ads for mortgage lenders once he began shopping for a mortgage in September 2004. Block, a manager for Bard Peripheral Vascular, a manufacturer of surgical devices, went with Bank of America after reading a poster advertising mortgages while he was waiting to deposit a check.

Because he'd been working for only nine months and had no money for a down payment, Block ended up with two mortgages: a five-year ARM for 80% of the value, and a 10-year ARM with a higher rate for 20%. He used the loan to buy a loft in San Francisco that he shares with his fianc¨Ĥe, Ashlee Willis.

Block, who holds bachelor's degrees in biochemistry and entrepreneurship from Miami University of Ohio, says nothing prepared him for the mortgage process.

"I basically did a crash course on all the different options that people were trying to sell me all the time."

Dina Burke, 42, of northern New Jersey, says she tried to research her options when she and her husband refinanced their mortgage. But the complexity of the process and the array of choices led them to refinance with their existing lender. "We probably could have gotten a better deal somewhere else," says Burke, an engineer who is staying home with their two young children.

Comparing fees was particularly difficult, Burke says. "You get this piece of paper, a legal piece of paper, and the words are really tiny," she says. "It's really intimidating."

Facing a multitude of financial options, millions of people pay someone to help them decide. Most mutual funds sold outside 401(k) plans are "load" funds. That means investors pay brokers and financial advisers 5% or more of their initial investment to buy them.

Similarly, more than 60% of 529 plans are sold through brokers and advisers. More than 65% of home mortgages are originated through brokers, according to the National Association of Mortgage Brokers.

But selecting an adviser is anything but straightforward. Designations for financial professionals run the alphabetical gamut: certified financial planner, certified public accountant, personal financial specialist, chartered financial analyst, to name a few. There are also fee-only and fee-based financial planners, along with planners who work solely for commissions.

Questionable brokers

Worse, not all professionals are looking out for their clients' best interests. In October, Ameriprise Financial Services agreed to pay a $1.25 million fine to settle charges by the NASD that it had sold unsuitable 529 plans to investors.

The NASD said brokers for the company sold out-of-state plans to investors who could've received tax breaks by investing in their own states' plans. Ameriprise neither admitted or denied the charges.

Joe Strahosky, 62, of Elysburg, Pa., says he approached a regional brokerage two years ago, seeking advice on how to save for retirement. He ended up investing in five annuities. Now he wonders whether the adviser was more interested in generating commissions than helping him save. "Why not just one annuity?" he wonders now.

Not everyone feels paralyzed by choice. Neil Brown of Colorado Springs selected Colorado's 529 plan for his 11-year-old son because it offers a state tax break and is managed by Vanguard, which also manages his 401(k) plan. He also has an education savings account for his son through Vanguard.

Financial choices are "complex, but many things are complex," Brown says.

Similarly, Bill Janin of Baton Rouge says he's starting to enjoy piloting his own 401(k) plan. Last year, he earned 8.5%, vs. 6.6% for the average stock fund. "Choices are a good thing," he says. "It's the decisions that are the tough part."

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