PSNC 2011: Misbehavioral Finance

At the PLANSPONSOR National Conference in Chicago last month, panelists discussed ways in which plan sponsors might struggle in fulfilling their fiduciary duties. Even sponsors with the best intentions may be doing unintentional harm to their plan and their participant’s likelihood of having a secure retirement if they fall into some of these traps.   

Tim Black, Senior Vice President at Mosse & Mosse Associates pointed out that in the last five years, there has been a big institutional push to fix participant behavior with auto-features. But plan sponsor problems, such as a “herd mentality,” “analysis paralysis,” or “recent-cy bias” are often ignored. The “herd mentality” is when everyone on the investment committee just wants to stick to the norm and no one wants to be the one to suggest any changes. “Analysis paralysis” sets in when investment options are being over-analyzed and the committee is incapable of making any decisions, and alternatively, the “recent-cy bias” occurs when the committee too swiftly changes their plan with the changing forecasts.   

Diane Gallagher, Vice President at J.P. Morgan Asset Management, has extensive experience in dealing with participant communications. She said that plan sponsors need to leverage the power of communications as much as possible “to make it hard for people to fail.” She pointed out that implementing a strong plan design is critical, but it must be communicated to the plan participants for the plan to truly succeed.   

Jennifer Flodin, COO and Co-Founder of Plan Sponsor Advisors, a retirement benefits consulting firm, said that plan sponsors need to take a more active approach in “re-engineering” their plans. “You need to take a step back and think about what this plan is intended to do; are you getting any [return on investment] on it? That can help you refocus your responsibilities.”  

Lastly, Kristi Mitchem, Head of Global Defined Contribution at State Street Global Advisors, said there is a consistent fear among investment committees of receiving a negative reaction from the participant base if any action is taken regarding the plan.    

“That is a classic 'misbehavior,'" she said, adding that we tend to “over-extrapolate” the power of the small percentage of participants that would bother to vocalize their concerns.  “Usually only five or 10% would be vocal. We are scared that that percentage is representative of the entire participant base. So we delay making change for fear of upsetting the whole. But this is not realized,” she concluded.