In a recent speech, Charlie Ellis, founder of the international consulting firm Greenwich Associates, shared the challenges 401(k) participants face in becoming better investors. As outlined recently in Think Advisor, Ellis cited survey data which indicated that 80% of people think they’re above-average investors. He shared the following false signals that lead to that conclusion:
- Confirmation bias. We actively seek and retain information that confirms what we already believe.
- The “our crowd” effect. If our friends believe what we believe than we all must be correct.
- Hindsight bias. In hindsight, it really wasn't our fault. We attribute bad investment outcomes to things we can understand rather than to unpredictable market events.
- Failure to admit defeat. We don't cut our losses early. Once an investment decision is made, we like to see things through. We fall in love with some of our investments.
- Fight or flight reactions. We let emotions drive our most important investment decisions.
How can you educate 401(k) plan participants to become better investors in light of these challenges? Consider including the following points in your next employee education presentation:
- Risk appropriate allocations. Investments should be allocated based upon a participant's ability to bear risk while considering his/her age and retirement goals. Allocations should be reviewed annually.
- Never stop saving. Regardless of market fluctuations, participants need to continue to save and invest.
- Actively managing emotions. Since participants will be emotional at market tops and bottoms (where many investing mistakes are made) they should be encouraged to develop a strategy to manage their emotions at these times. For example, making a commitment to get professional investment advice when they feel the urge to make an investment change at market tops or bottoms.
Consider sharing these solutions in your next employee education presentation to help the 401(k) participants you work with become better investors.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). Mr. Lawton was named as a Top 100 Retirement Plan Adviser by PLANADVISER and a Top 300 Retirement Plan Adviser by 401(k) Wire. Mr. Lawton may be contacted at email@example.com or 414.828.4015.
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