Make It So Easy A Caveman Can Do It*

Did you miss PSCA’s 2019 National Conference? If so, you missed out on two timely presentations on investments:

• Philipp Meyer-Brauns, Ph.D., senior researcher at Dimensional Fund Advisors, spoke on “Retirement Investing at the Summit,” which was a discussion of the impact of market volatility on retirement saving and investment¹, while
• Clearstead’s Sarah Parke, Microsoft’s Brandon Diersch, Comerica’s Renee Gallagher, and Fiduciary Investment Advisors’ Dennis Scarpa presented “DC Plan Investment Line-Up Simplification – what it is, why a plan sponsor should consider it, and trends and considerations to implement such a structure.”

I was reminded of those presentations when I read Jason Zweig’s May 17, 2019 Wall Street Journal column. The newsprint version was titled “Our Caveman Brain Isn’t Built for Investing,” and the online version was titled “Mr. Market Just Got Inside Your Head².”

Zweig highlighted the lingering effects of stock market volatility: “When stock markets fall sharply and immediately recover, the losses seem to disappear. But that doesn’t mean no one feels any pain. Big market moves, like flashbulbs that go off in your face, do blur your vision – whether investors realize it or not. In general, negative events sear themselves into the human mind more deeply than positive outcomes do. Over the millennia, evolution has sensitized humans to danger.“

Jason confirmed that Dow Jones Market Data shows that the Dow has fallen by more than 2% 1,011 times – averaging once every 33 trading days since 1896. By historical standards alone, investors should expect stocks to fall by more than 500 points once every six weeks or so.

So what? Who cares? As they say, past stock market performance is not predictive. But, if you look back through almost 100 years of S&P data, 73% of the years had market increases (in the black) while 27% of the time, the market declined (in the red). So, a gambler at the roulette wheel would “always bet on black.³”

With all this market movement, what’s a retirement savings plan participant to do? And, how can you as a plan sponsor help?

Assuming you have a diverse workforce, with varying levels of financial and investment expertise, you may want to start with a simple investment lineup that incorporates:

• Adequate diversification of investment choices (traditional asset classes with different risk characteristics, active and passive choices), coupled with
• Behavioral protections anticipating inertia and naïve diversification (a modest number of choices, a Qualified Default Investment Alternative, etc.)

Another action to consider is to introduce and encourage investment investment discipline through mandatory, periodic, active choice updates:

• Adding and marketing rebalancing provisions,
• Confirming the impact of past and anticipated future market volatility on long term savers/investors – how a decline is probably not a selling opportunity – but may be a buying opportunity for those at early stages in the retirement preparation journey,⁴
• Improved transparency for target date investments⁵, and
• Improved participant engagement via reassessments to confirm any evolving circumstances (such as changes in accumulated assets, risk appetite, personal circumstance, payout commencement date, health status, etc.).

Mandated disclosures may not be enough for many participants. Don’t assume participants actually read their quarterly statements or go much beyond the first page that shows the account balance. Remember that many workers don’t even read their pay advice when the direct deposit amount appears to be accurate.

*Geico Caveman Commercial, 2006, Accessed 5/18/19 at: https://www.youtube.com/watch?v=H02iwWCrXew&app=desktop
¹J. Towarnicky, Investment Thrills & Chills – Volatility, 4/16/19, Accessed 5/18/19 at: https://www.psca.org/blog_jack_2019_23
²Jason Zweig, WSJ, Accessed 5/18/19 at: https://www.wsj.com/articles/mr-market-just-got-inside-your-head-dont-le...
³Wesley Snipes, Passenger 57, Accessed 5/18/19 at: https://www.youtube.com/watch?v=awcx-gTQDLM&app=desktop See also: Bill Nygren, Market Commentary, 3/31/19, Accessed 5/18/19 at: https://www.oakmark.com/Commentary/Commentary-Archives/Bill-Nygren-Marke...
⁴J. Towarnicky, Retirement Investing At The Summit – Investing When Equity Markets Are At All Time Highs, 11/30/18, Accessed 5/18/19 at: https://www.psca.org/blog_jack_2018_54
⁵J. Towarnicky, Target Date Investments, 3/6/19, Accessed /18/19 at: https://www.psca.org/blog_jack_2019_14