Sharpe tells DC plan execs: Make 'magical thinking' disappear

William Sharpe
William F. Sharpe

Nobel Laureate William F. Sharpe told defined contribution plan executives Tuesday to avoid “magical thinking” in building and maintaining DC plans.

Speaking at Pensions & Investments' West Coast Defined Contribution Conference in San Francisco, Mr. Sharpe said such thinking includes unrealistic assumptions of investment gains in a DC plan's asset accumulation phase, and unnecessary risk in a plan's decumulation phase when participants withdraw money for retirement.

“I implore you to try to avoid magical thinking and try to employ good economics,” Mr. Sharpe said.

During the accumulation phase, Mr. Sharpe warned that sponsors, providers and participants can make the mistake of expecting consistent investment returns annually. However, “we're getting better” at acting more realistically.

Mr. Sharpe said he remained worried about a defined contribution plan's decumulation phase. “You can't get rid of market risk by some fancy glidepath or market strategy,” he said.

Mr. Sharpe, who won the 1990 Nobel Prize in Economic Sciences, received the 2012 Lillywhite Award, an annual recognition for lifetime contributions to economic security sponsored by the Employee Benefit Research Institute. He's also the STANCO 25 professor of finance, emeritus, at Stanford University Graduate School of Business.