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We all worry. You might be surprised to learn that the worry we devote to our 401k plan investments has been studied. Worry is never constructive. It is even less helpful when it alters the way we manage our 401k plan investments. Recent behavioral finance studies have shown that the more we worry about our investments, the more conservatively we invest.

Overcoming Worry

We run from stocks due to worry

Recent studies have shown that the more frequently investors review their portfolio’s, the more conservatively they invest. This is not a positive outcome. Investing too conservatively keeps 401k)plan investors from building an account balance large enough to retire without making significant changes to their standard of living. Investors who reviewed their portfolio’s on a monthly basis had allocations of roughly 60% bonds and 40% stocks. Conversely, those that reviewed their portfolio’s annually had allocations of 70% stocks 30% bonds – a huge difference.

Volatility causes loss aversion

Researchers found that the more frequently investors reviewed their portfolio’s, the more they became aware of short-term volatility and the impact it had on their balances. More frequent exposure to volatility resulted in feelings of loss aversion – study participants became more afraid of the negative impacts of volatility. Even though losses due to volatility were not realized (since participants took no action) the paper losses monthly viewers experienced caused them to adopt much more conservative portfolio allocations.

Overcoming worry in 401k plans

Unfortunately, participants are most likely to review their portfolio’s when the market falls. Fear of additional loss causes many to realize losses by selling equities and electing a more conservative allocation. Plan sponsors should make sure, in times of volatility, to encourage participants not to deviate from their savings and investment plans. They should also strongly encourage participants to call the plan’s investment advisor before making any changes.

Many participants make bad decisions based upon fear during periods of time when the stock market falls. Try and help them avoid these mistakes by encouraging them to reach out to your investment advisor.


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 bob@lawtonrpc.com.

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 bob@lawtonrpc.com or visit the firm’s website at: https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

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.