Shlomo Benartzi, the UCLA professor and Allianz behavioral economist, opened his session at the Center for Due Diligence’s 2011 conference on Wednesday with a short survey for the audience rearding 401(k) participation.
In it he asked advisors what percentage of employees should be participating in their employer’s plan; what percentage of their salaries they should be deferring; and what percentage of participants would be better off selecting “one-stop” options like target-date funds instead of attempting to self-construct their own portfolio.
“It’s not enough to think about improving outcomes,” Benartzi said while attendees’ answers were being tallied. “There’s plenty of discussion about legal liabilities and fees in plans.”
Rather, advisors need to focus on ways to improve employee access. Half of employees do not have access to a 401(k) plan, Benartzi, said. Furthermore, a third of employees who have access don’t take advantage of it, partly due to procrastination. And, “as we all know, tomorrow is a different kind of day that never arrives,” said Benartzi, professor and co-chair of the behavioral decision-making group at UCLA and the chief behavioral economist at Allianz Global Investors Center for Behavioral Finance.
Further hindering employees’ retirement plans are low savings rates that hover around 6% and their tendency to self-construct portfolios.
In spite of all this, advisors largely believe that all Americans deserve access to a 401(k) plan; that at least 90% should be participating in their employer’s plan; that savings rates should exceed 10% at least; and that 90% of investors should let an advisor build their portfolio. Benartzi called this 90-10-90 rule the PlanSuccess system.
A successful retirement plan begins with a behavioral audit to evaluate the plan followed by implementation of suggested improvement. Finally, adivsors must measure results to gain a real understanding of the plan’s success.
Benartzi described three behavioral obstacles to a successful retirement plan:
- Loss aversion
Advisors and plan sponsors have already started implementing solutions to these obstacles. Inertia can be fought with automatic enrollment. The sequence in which funds appear is also important. The first fund on the investment menu tends to get the most assets. Rather than listing funds alphabetically or according to risk, beginning with the funds that are appropriate for the largest number of people can help direct assets into a more appropriate fund than they might have chosen otherwise.