The hidden upside of QDIAs – Carosa
It turns out lack of employee engagement in their company’s retirement plan might not be such a bad idea after all.
It’s a struggle the retirement industry – from plan sponsors to service providers to regulators and public policy makers – has been trying to tackle since Ted Benna first discovered the Easter Egg Congressman Barber Conable hid under IRC Sec. 401(k) in the Revenue Act of 1978.
And yet, in the last few months, have we discovered the benefit of something we have for so long been trying to prevent?
The fourth quarter of 2018 saw the market dip into near-correction territory. The return of the usual volatility of the equity markets may have allowed us to stumble upon an heretofore overlooked advantage of QDIOs (see “Recent Market Volatility Has Revealed This About Target Date Funds,” FiduciaryNews.com, January 15, 2019).
Congress formalized in the 2006 Pension Protection Act decision-making inertia to help, rather than prevent, employees save more for their retirement. For any number of reasons, far too many workers were not opting into their 401(k) plan.
By switching the decision from an opt-in to an opt-out, automatic enrollment blossomed and more employees began to save for retirement.
You’d think this would have made everyone happy. It did not. Many felt a need to press employees to become more engaged in their company’s retirement plan.
In fact, with greater participation, there was an expectation greater engagement would result. It did not. For a very obvious reason.
An employee accepts the default investment option because they’re predisposed to not thinking about the “hard stuff” (i.e., investments) of their retirement plan. If employees don’t want to think about their retirement plan, why would they ever want to “engage” with it? They won’t.
For years, many considered this lack of engagement a bad thing. It was hoped more engagement would lead to more savings, better financial decisions, and a more comfortable retirement.
This may be all well and true. The push for greater financial literacy is a noble one and we must continue to pursue it.
But understanding personal finances and engagement in one’s retirement plan are not necessarily the same thing.
It turns out, that may be a good thing.
The greatest fear of the financial industry is people buying high and selling low. Wild gyrations in the market (both on the upside and the downside) can lead to this detrimental behavior.
The common advice professionals offer during periods of headline-making volatility is “turn off the TV and don’t read the newspaper.” More directly, they say to ignore the short-term swings because retirement investing is a long-term proposition (even when you’re retired).
Maybe all that lack of engagement helps employees ignore the market’s impact on their retirement savings. This becomes a major advantage of the “forget it” part of “set it and forget it.”
Perhaps those 401(k) do-it-yourselfers might want to take a lesson from their less engaged peers when it comes to reacting to market volatility.
READ MORE:
401(k) participants say the darndest things — Carosa