If we recognize the mainculprit to falling prey to hype – recency – then the solution isquite simple. (Photo: Shutterstock)

We've all been there. A super confident employee, one thatwatches CNBC diligently, reads the Wall Street Journal daily, andmaintains an active brokerage account, insists the plan sponsor include this “must have” mutualfund in the company 401(k) plan.

Of course, the plan sponsor usually turns to the plan adviser for, well, “advice.” The adviser,in turn, doesn't want to tell the plan sponsor “no” (because theclient is always right).

Instead, the adviser offers a lame, “Well, you could include itif you want to” with the “but” implied but not spoken aloud.

What the adviser and the plan sponsor both must do is get pastthe hype behind the employee's request. While investment optionsoften see this kind of hype, it's not the only topic that can foolthe plan sponsor (see “Will 401k Plan Sponsors Fall for TheseOver-Hyped Topics?” FiduciaryNews.com, January 8, 2019). Hypesurrounds us. It can present a minefield for the inattentivefiduciary.

When you read through all the news (and not-so-news) articlesthat have passed through the various digital screens before youreyes, it's easy to start echoing certain mantras. Repeatingheadlines tend to influence our sense of priorities.

This is a form of the behavioral anomaly known as “recency” –placing undue emphasis on something that you've seen mostrecently.

Recency can skew your decision-making process. That might beacceptable if your decision impacts only you. If you're serving ina fiduciary capacity, you don't have the luxury of using the“recency” excuse as the reason for making what turns out to be anuninformed decision.

The news media tends to read (and trust) itself. This, in turn,leads to those “variation on a theme” headlines and repetitivestory topics. If you're selling a product, you try your best toposition your product within this never-ending cycle of reportercopying reporter copying reporter. These old-fashioned viralstories generate a marketer's dream: hype.

A good fiduciary, though, needs to see through the hype and basedecisions solely on matters of import. Of course, they first mustseparate the wheat from the chaff to determine what is news andwhat is hype.

This isn't as easy as it sounds. For one thing, hype, likehumor, works because it's based on truth. This mantle ofcredibility is just enough to lead the fiduciary astray.

If we recognize the main culprit to falling prey to hype –recency – then the solution is quite simple. “All Time Greatest”list makers use this method to avoid polluting their rosters withtemporary fads. It's the same concept used by Hall of Famecommittees to make sure only the enduring best will make it intotheir hallowed halls.

What is this strategy? Sleep on it. These list makersand committees require a certain time interval to go by before acandidate can be considered.

For example, a car must be at least 25 years old before it canbe considered a “classic.” Sports figures can only be nominated forHalls of Fame after they've been retired for a minimum of fiveyears.

Likewise, plan fiduciaries need to give ideas time to percolatebefore acting on them. How much time depends on the specifictopic.

When it comes to adding funds to the plan menu, there's noproblem waiting a few years to test the durability of the portfoliomanager. Plan policy changes, unless mandated by regulators, maytake longer.

Does this sound too conservative for you? It may, but that's bydesign. For fiduciaries, downside risk often poses a greaterliability threat than missing the upside potential.

Then again, if we overdo this, we've entered into anotherbehavioral anomaly: myopic loss aversion.

But that's fodder for a future column.

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