How can retirement plan sponsors and participants know the right answers if they don’t ask the right questions? Allow me to start my answer by telling you a story.
A man by the name of Chaerephon (can’t pronounce it? it doesn’t matter because you’ll never see it again) asked the Oracle of Delphi if there was no man wiser than his friend Socrates. The priestess pondered then answered, “There is no man wiser.” When told this, Socrates didn’t believe it, “I know that I have no wisdom, small or great.”
So he travelled the land searching all those he thought wiser. One by one he met them and, with each disappointment, Socrates began to see the wisdom of the Oracle’s remark. Unlike Socrates, all these other men thought they knew everything. Socrates alone knew he didn’t know what he didn’t know. In other words, knowing he wasn’t wise made him the wisest of all men.
You don’t have to be a philosophy major to appreciate the meaning behind this story. In fact, it applies to all fields, including retirement planning.
It turns out we find the same sort of “wise” folks in the retirement arena that Socrates found in ancient Athens. In the rush towards financial literacy and employee education, it’s not surprising to see plan sponsors and plan participants asking questions. The issue is: are they asking the right questions (see “Why aren’t 401k Plan Sponsors and Participants Asking These Questions?” FiduciaryNews.com, January 10, 2017).
When plan sponsors think they know all the right questions to ask, they may be inadvertently exposing themselves to increased liability. This is the problem with all the attention being paid to fees (and, before that, all the attention that was being paid to the investment menu).
No, being a plan sponsor doesn’t give you permission to focus on only one thing. Plan sponsors need to ask a wide breadth of questions, including asking which questions they should be asking but aren’t.
And it all starts with this pre-eminent question: “How can I best promote the best interests of the beneficiaries of the plan?”
The same can be said of plan participants, although I must admit the industry has done a pretty good job at redirecting them over the past few years.
In the old days, employees placed too much emphasis on investments. Some of them still do ask questions on this topic.
While more are getting closer to ask the right question, they’re still beating around the bush. They’re asking questions like “How much will I need?” (thinking in terms of a dollar objective) when they should be asking “What return do I need to meet my retirement goal?” (thinking in terms of a Goal-Oriented Target [GOT] objective).
Once employees get their arms around and understand the true nature of their GOT, then they can start playing with different scenarios involving savings deferral rates and retirement date. The retirement calculator they should use isn’t the typical “asset allocation” calculator. Using these popular calculators leads to typical irrelevant questions like, “How much should I investing in each asset category?” “What return rate assumptions should I use for each asset category?” and “How much should I assume inflation should be?”
The more important questions are “How much can I contribute each year?” and “At what age can I retire?”
The challenge with the “Socratic” definition is identifying who knows all the right questions. It’s clear there are questions that are farther from the mark and questions that are closer to the mark.
Probably the best approach would be to continue asking and surveying the wisdom of the “crowd.” No man might be wiser than Socrates, but dollars to donuts the entire city of Athens tops him in wisdom.