3 ways to help 401(k) plan participants become better investors

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, then 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 help participants in your 401(k) plan become better investors in light of these challenges? Consider including the following points in your next employee education session:

• 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, encourage them to make a commitment to get professional investment advice when they feel the urge to make an investment change at market tops or bottoms.

Talk with your investment adviser to ensure these important points are included in your next employee education presentation.
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. He may be contacted at bob@lawtonrpc.com or 414.828.4015.

Do you agree? What investment education tactics have worked for your organization? Share your thoughts in the comments.