Behavioral Finance: How Participants Make Decisions
Posted by on December 14, 2017
Behavioral finance research shows most 401(k) participants are not active decision-makers. In fact, most participants are dominated by five key behavioral traits: inertia, procrastination, choice overload, endorsement and framing.
This week, we hosted Dr. Greg Kasten of Unified Trust for a webinar discussion that explains these behaviors and how appropriate strategies can be enacted to allow for participant success despite these behaviors. You can view a recording of that presentation in our webinar archive.
We ran out of time before being able to answer all of the questions that were submitted during the call, but Dr. Kasten was generous enough to provide follow up answers to your questions:
Q: Can you expound on the goal process at enrollment? Are you saying something like a risk/return questionnaire at enrollment?
A: No we are really not talking about a risk and return questionnaire that the participant must fill out. Some may choose to do that and of course we let them. But most are overwhelmed with filling out risk questionnaires and we handle it ahead of time. And, of course, a risk questionnaire tells you nothing about replacing a paycheck. We handle risk by finding the fully funded solution for the participant with the least amount of risk. We’re talking about determining a goal for all participants ahead of time, solving for the solution and presenting the answer in the enrollment.
Q: You mentioned choice overload, do you have a view on how many assets classes vs. funds should be available?
A: The simplest choice is to simply not have to opt out of the program. A fund menu may have 15 or 20 investment choices. But the idea of the QDIA managed account solution is that the answer has been determined and the only choice the participant has to make is to not opt out of the program.
Q: What do you suggest to be a good income replacement ratio and does your answer include government entitlements?
A: There can be a range of replacement ratios. Most people generally believe 70% to 80% is adequate. We use 70% unless the plan sponsor wants a different number, or the participant wants a different number. Less than 5% want a different number. The amount does include their estimated Social Security benefit.
