By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
In a recent speech, Charlie Ellis, founder of the international consulting firm Greenwich Associates, shared the challenges 401k participants face in becoming better 401k investors. As outlined recently in ThinkAdvisor, 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 401k plan become better 401k investors in light of these challenges? Consider including the following points in your next employee education session:
1. 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.
2. 401k investors never stop saving
Regardless of market fluctuations, participants need to continue to save and invest.
3. 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, making 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 to help your participants become better 401k investors.
About the Author
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
About Lawton Retirement Plan Consultants, LLC
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.