We've all been there. A super confident employee, one that watches CNBC diligently, reads the Wall Street Journal daily, and maintains an active brokerage account, insists the plan sponsor include this “must have” mutual fund 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 the client is always right).

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

What the adviser and the plan sponsor both must do is get past the hype behind the employee's request. While investment options often see this kind of hype, it's not the only topic that can fool the plan sponsor (see “Will 401k Plan Sponsors Fall for These Over-Hyped Topics?” FiduciaryNews.com, January 8, 2019). Hype surrounds us. It can present a minefield for the inattentive fiduciary.

When you read through all the news (and not-so-news) articles that have passed through the various digital screens before your eyes, it's easy to start echoing certain mantras. Repeating headlines 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 most recently.

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

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

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

This isn't as easy as it sounds. For one thing, hype, like humor, works because it's based on truth. This mantle of credibility 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 with temporary fads. It's the same concept used by Hall of Fame committees to make sure only the enduring best will make it into their hallowed halls.

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

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

Likewise, plan fiduciaries need to give ideas time to percolate before acting on them. How much time depends on the specific topic.

When it comes to adding funds to the plan menu, there's no problem waiting a few years to test the durability of the portfolio manager. Plan policy changes, unless mandated by regulators, may take longer.

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

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

But that's fodder for a future column.

READ MORE:

A 3-word fiduciary rule — Carosa

The 'Fiduciary Rule' versus the 'Rule of Fiduciary' — Carosa

Do you have the 'knows' to be a fiduciary? — Carosa

Instant Insights /

A fiduciary must separate the wheat from the hype – Carosa

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