The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

The Importance of Behavior

October 2017

Today’s awarding of the Nobel Prize in Economics to Dr. Richard Thaler of the University of Chicago reminded me of the influence his work has had on my work with retirement plans.

Whether you’re a plan sponsor or an ERISA professional, chances are that Thaler’s work has also influenced you, whether you realize it or not.

Asked to describe the key takeaway from his years as a pioneer in the study of behavioral economics, Thaler emphasized that “…economic agents are humans and…economic models have to incorporate that.” (The Wall Street Journal, October 9, 2017).

Economists tend to focus on the numbers, but Thaler realized that we also have to understand the impact that human emotions and biases have on our economic choices.

Any fiduciary to a retirement plan should consider Thaler’s work when determining how choices are presented to employees. The importance of “choice architecture” has certainly guided our work in structuring investment menus for retirement plans. After all, you can build the best diversified portfolio imaginable, but if you can’t get participants to invest in it, then the hard work is all for naught.

By understanding that the vast majority of participants don’t want to manage their own assets, we purposefully structure investment menus to quickly guide them to one of five risk-based model portfolios as their first choice.

Most plans today offer some sort of do-it-for-me option, but those options are typically placed right alongside an expansive menu of mutual funds. If participants aren’t provided with hands-on direction as to which option is best for them, they too often end up with “analysis paralysis” and make poor economic decisions or not decisions at all.

As you go through benefit re-enrollment for the coming year, I encourage you to think about how you’re presenting choices to participants and how Dr. Thaler’s Nobel Prize-winning work might help influence better choices and better behaviors for your employees.

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