More and more professionals are convinced the industry has spent a generation of disservice to retirement savers by emphasizing the investment part of their 401k plan. Even today, DOL-mandated fee disclosure, with a separate line item of "Investment Adviser," can confuse plan participants into believing they – as opposed to the plan sponsor – are receiving (or even need) investment advice.
Those responsible for printing out employee statements have a duty to distinguish between "individual-level" investment advice and "plan-level" fiduciary services. Until this is done, who can fault employees for the confusion?
In the meantime, fiduciaries can best help employees by providing general education that both promotes savings and focuses on avoiding the most common mistakes made by retirement investors. Think of these as the three "overs" that can cause 401k to "under" achieve their retirement goals. Fortunately, these errors tend to derive from emotions. This means it only takes an ounce of discipline to defeat them and stay comfortable on the road to retirement readiness.
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No. 1: "Over"-Caution: Many advisers have no-doubt seen this phenomenon over the past five years. The market fall in late 2008/early 2009 shocked almost everyone. The resultant "deer-in-the-headlights" look led many to simply ignore their 401k statements. This form of "physic numbing" (it's a real term, look it up) actually benefited those people. Most 401k plans recovered by the end of 2010 and those particular antlered employees have returned to the road of retirement readiness.
On the other hand, those who reacted by climbing into their financial shell (i.e., converting equities to cash) may still not have regained their losses. Over-caution is a killer emotion that leads investors to buy high and sell low. You can read about it more in "3 (Bad) Reasons 401k Investors are Over-Cautious" (FiduciaryNews, April 9, 2013).
No. 2: "Over"-Diversification: This one's almost entirely on the shoulders of the financial industry. For years we taught investors to reduce the risk of "betting it all on 22" (the roulette equivalent of owning only one stock). Portfolio diversification is what mutual funds are all about, Charlie Brown. The trouble is, once we got into this whole "style-box" thing, we stopped talking about diversifying portfolios of stocks and began claiming the need to diversify portfolios of mutual funds. This is like telling people to diversify their roulette bets by betting on both "red" (an already diversified portfolio of all red numbers) and "black" (an already diversified portfolio of all black numbers) at the same time. This strategy conveniently forgets there are two "green" numbers (0 and 00). This means any intent to diversify this way will lead only to guaranteed losses.
The good news is many more people have opted to take the "one-portfolio" approach. This appears as a return to the old way of investing in mutual funds. This is where the investor allows the fund's portfolio manager to handle all diversification issues. For more info, see "The 2 Least Understood Investment Rules That Most Hurt 401k Investors," (FiduciaryNews, April 16, 2013)
No. 3: "Over"-Confidence: If you thought over-caution was bad, wait until you meet its opposite. Overconfidence is much more than the Rabbit losing to the Hare. It's more like Duane "the Rock" Johnson and Samuel Jackson believing then can survey a 10-story jump in the move The Other Guys. The Greeks had a word for it. (Of course, the Greeks had a word for everything. But then the Romans stole them and Latinized the world.) Heroic hubris – a sinful exaggeration of confidence – always precedes a heroic fall. And if it works in Greek Tragedy, it's bound to work in the investing markets. Can't get enough about over-confidence and the Greeks? Read more in "Detecting These Signs of Overconfidence Can Help 401k Investors Avoid a Fall," (FiduciaryNews, Dec. 3, 2013)
The good news is the current market highs suggest we've "over"-come the problem of "over"-caution. The bad news is we may have entered the realm of "over"-confidence. In either case, "over"-diversification won't help. All three can cause 401k investors to "under"-perform. Which leads us to the most important lesson we can teach plan participants: Achieving retirement readiness is more about controlling emotions than it is about understanding the next great investment fad.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
