Uncategorized

401(k) “re-enrollments”: Nudging employees to make bad decisions

close

Email a Friend

Far be it from me to argue with behavioral economist, Richard Thaler (Nudge was awesome, bro) but 401(k) re-enrollment is only good for the sponsors of such plans like T. Rowe Price ($TROW).

The WSJ is reporting this morning on a growing trend for employers to choose something called “re-enrollment” for their employees’ retirement plans.  It goes like this:

Employees have the options of sticking with their current investment selection, if it’s still offered, or choosing another mix. But in a re-enrollment, unless the participant specifically opts out, his or her 401(k) will be re-allocated to the company’s chosen default investment.

Thaler was concerned that employees don’t have enough time/brainspace to make better decisions so it sounds like he likes this approach

“Many [participants] never change their asset allocation or contributions over their working lifetime, meaning that their asset allocation as they get older can be quite different than the one they intended,” says Richard Thaler, professor of economics at the University of Chicago Booth School of Business

Listen, I’m all for nudging children towards better eating habits by the strategic placement and display of such foods in school cafeterias but forcing employees to a made-up allocation for exposure to the stock market…well, not only is that paternalistic, that’s just bad investing.

Digging deeper into target date funds

I understand where the companies are coming from.  The data show that rarely — if ever — do employees change their asset allocations.  Fine — but what target date funds do is determine exactly how much allocation investors in such funds should have to the market.  The hope is that returns will be X over a certain time period (the target date).

But guess what?  These things always had too much exposure for most investors to the broad stock market and remain badly markets, explained and disclosed (and that’s the dig by industry rag, Morningstar).  Another market plummet and wham, a lot of employees who didn’t even realize they had been re-enrolled will wake up with a lot less $$ in their retirement accounts.

The truth is that target date funds are a flawed product for a genuine problem: helping guide retirement investors to make better decisions.  The answer isn’t ensuring they max out on equity allocations.

Only thing this is good for is the stocks of the mutual fund companies who run 401 (k) plans.  This smacks of being “the industry solution” for the vast build-up of cash in most retirement accounts.

Well, O retirement investor, consider yourself (re)warned.

As for actionable investment ideas? I’d love to see exactly how much cash there is on the sidelines and expectations for re-enrollment.  This could be a good catalyst for Franklin ($BEN) and T. Rowe Price ($TROW) as this cash gets crammed into mutual funds.

Read more

  • Your employer knows best. Perhaps. (WSJ)
  • New Problems with 401(k) Target Date Funds (Institutional Investor)
  • A new 401(k) default? Moving money into target funds (Nudge Blog)
  • Morningstar 2010 Target Date Fund Survey (Morningstar)

0 comments on “401(k) “re-enrollments”: Nudging employees to make bad decisions”

Events, Uncategorized

New speakers announced for Tearsheet’s Resilience Conference

  • The Resilience Conference will celebrate the people, teams and companies successfully navigating through this crisis.
  • 3 new speakers have just been announced.
Tearsheet Editors | June 25, 2020
The Customer Effect, Uncategorized

Inside Yielders, the UK’s first regulatory compliant Islamic crowdfunding platform

  • Yielders, an equity-based crowdfunding platform for real estate, is the first Shariah-compliant financial technology company to get regulatory approval in the U.K.
  • The platform's user base is 35 percent non-Muslim, some of whom may be attracted to the ethical investing principles.
Suman Bhattacharyya | May 18, 2017
Sponsored, Uncategorized

FinTech is changing your life, and you don’t even know it

Brandeis University | May 01, 2017
Uncategorized

FinTech Week: By the numbers

  • Empire Startups' inaugural FinTech Week begins today in New York
  • In preparation for 25 forthcoming events over four days, here's a breakdown by the numbers.
Tanaya Macheel | April 24, 2017
Uncategorized

Hi 5! The top five fintech stories we’re following today

  • Retailers may be looking into the future as opposed to implementing for today.
  • Banks are working to get more people comfortable using mobile apps.
Zack Miller | February 06, 2017
More Articles