WHICH QUESTION DO you think
the typical retirement plan
participant could answer the
quickest: “What is the long-
term impact of your asset
allocation on the growth
of your retirement plan?”
or “What is the immediate
impact to your weekly spend-
ing if you contribute $10 more a
paycheck into your 401(k)?”
Therein lies the reason we no
longer see hours of employee ed-
ucation dedicated to style boxes,
growth versus value definitions,
and other remnants of Modern
Portfolio Theory. The truth of the
matter is people just don’t need
to know that stuff.
Gone are the days when everyone watched CNBC in anticipation
of sneaking off to some hidden
cubicle to place a few day trades.
Remember those days? Everyone
amped to discover the latest sure-thing
“home run” stock. In fact, today, according
to a December 2018 Business Wire release,
“CNBC recorded its second-lowest rated
year in the past 25 years.” Face it, believers, high finance simply doesn’t generate
the highs it once did.
And that’s a good thing. People have
much greater dreams than to understand
and contemplate the intricacies of the
capital markets. To the extent anything
regarding their company’s retirement plan
impacts their daily lives, their interest will
be greater (and their eyes less tired) if the
subject turns to topics which they can
actually control in an immediate way.
Yes, they control which investments
they select, but the results of that “con-
trol” aren’t instantly felt. They have a
similar control over their savings rate,
and the impact of that decision is some-
thing they can see right away.
Does this sound counterintu-itive? You’d think that quick
impact would frighten them
away. It doesn’t.
Feeling the results of your
decision, rather than scaring
you away, actually leads to
greater satisfaction in that de-
cision. It’s a form of a “self-justi-
fication” response. Contrast this
with your thoughts when you
don’t know the outcome of a de-
cision for a long time. You grow
anxious. You begin to question
the validity of your choice. You
draw closer to reversing what
may have originally been a sound
decision made dispassionately.
As your emotions peak, they
tempt you to select a less appro-
priate path. No one wants to go
down that path; hence, the pop-
ularity of target date funds and
other QDIAs. Why make a decision when
you don’t have to?
Allow me to amend that last statement: Why make an investment decision
when you don’t have to?
This doesn’t mean we should forsake
investment education for employees. We
don’t need to reject reiterations of fancy
formulas attempting to explain the machinations of the Capital Asset Pricing Model
and those ubiquitous asset allocation pie
charts. Rather, we must focus on the traps
investors allow themselves to fall prey to.
This requires investment education be
less Modern Portfolio Theory and more
behavioral economics. It’s not about
offense and finding home runs. It’s about
defense and hitting singles.
It’s far easier to stay ahead when you
don’t have to worry about catching up
after falling behind.
Do we teach investing anymore?
401(k) trends in
the last decade
or so has been
the shift from
of the widely
By Christopher Carosa
13.2% – Total savings
rate in DC plans in 2018.
86.9% – Participation
rates in auto-enrollment
plans in 2017.
$386,100 – Average
balance for employees
continuously invested in
a DC plan for 15 years
(per 2018 Fidelity Report “Building