Certified Plan Sponsor Professional (CPSP) Practice Exam

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Why do participants in some plans often default into money market or target-date funds?

Because of limited investment options
Due to too many choices leading to inertia
As a requirement of the plan
To avoid risks associated with investment

The correct answer is: Due to too many choices leading to inertia

Participants in some plans often default into money market or target-date funds due to the phenomenon known as inertia, which is influenced by the large number of investment choices available. In scenarios where participants face an overwhelming array of options, many may struggle to make a decision or feel paralyzed by choice. This can result in them defaulting to the pre-selected options provided by the plan, which are usually money market funds or target-date funds. Target-date funds are designed to automatically adjust the asset allocation as participants age, providing a built-in strategy that requires no active management from the individual. This can be particularly beneficial for those who may not have the time, knowledge, or confidence to engage with the complexities of retirement investing. Money market funds, offering liquidity and stability, appeal to defaulting participants looking for a low-risk option. By mitigating the decision-making burden, plans help participants to not lose out on investment opportunities altogether, even if they aren’t actively engaging in the investment process. This strategy ultimately facilitates participation in the plan while acknowledging the psychological barriers that often accompany investment choices.