NEW YORK -- Understanding defined contribution plan participant psychology and investment behavior occupied center stage late last month at the Pensions & Investments Defined Contribution/401(k) conference.
As 401(k) participant account balances have ballooned and the number of investment options continue to increase, this year's conference focused on the financial behavior of plan participants and how best to communicate with them in order to meet their overall financial objectives.
No less than four major sessions focused on investment psychology and behavior, centering on why participants take, or don't take, certain actions. The sessions sought to help plan sponsors and service providers understand what participants want and need in their 401(k) plans.
Most participants "are not making the optimal decisions" investing their retirement and personal assets, Brian Rom, president of Investment Technologies Associates, New York, told the more than 300 conference registrants.
He said behavioral finance and investment theory should be combined to create a process to ascertain what individuals "really feel" about investment risk and to identify investment strategies that match this risk attitude.
The key to determining participant risk tolerance and investment behavior may be measured by administering a well-constructed questionnaire that helps participants make relevant and comfortable investment decisions.
"Most people don't know what they think, and claim a higher risk tolerance than they actually have," Mr. Rom said.
In a session titled "Getting Inside Money Minds," Kathleen Gurney, chief executive officer of Financial Psychology Corp., Incline Village, Nev., said, "money is still a frightening concept" for most people and investment communications should be targeted.
"Most often we don't understand why we do what we do," she said, offering a 28-question investor profile questionnaire that may be used in developing communications strategies for the 401(k) market.
Materials, she said, should be specific and personal and plan sponsors should find out the nature of their participant population and "what is driving them and then give them something they need . . . a common message."
Steven Swets, director plan participant communication at Fidelity Institutional Retirement Services, Marlborough, Mass., said if investing "were an intellectual process, we'd all be rich. But it is not.
"Fear of failure is stronger than the elation of success," he said, when it comes to risk and investment decision making.
Employee meetings are still among the most popular and effective communication tools, Mr. Swets said. He advised plan sponsors to evaluate their communications programs.
"If you are sending out one retirement planning message to everyone in your company, look for ways to target different populations. Understand how people who work for you absorb their information best. . . . If your message is complex, look for ways to simplify. . . . Connect emotionally with your audience," he said.
Representatives of J.P. Morgan Investment Management Inc. discussed the firm's Participant Preference Model, a proprietary research-based model designed to help plan sponsors understand participant preferences and behavior before implementing changes in 401(k) plan design.
The model, through participant research, helps plan sponsors understand what participants want. It also allows sponsors to test multiple design scenarios and investment options before changes are proposed, said Robert Birnbaum, managing director.
The model provides sponsors with benchmarks for evaluating their plans, he said, allowing plans to predict participant reaction to different plan designs.
Keynote address speaker Gloria Reeg, managing director-consulting at the Frank Russell Co., Tacoma, Wash., said the 401(k) industry has yet to fully grasp all the "hard-won" lessons of defined benefit investing during the past two decades.
Specifically, nearly 80% of 401(k) assets in the U.S. are concentrated with the largest 25 service providers, 56% with the top 10, and 39% with the top five, she said.
Single-manager options are the norm, she said, "when we know that prudence demands diversification by style.
"The current defined contribution market is dominated by blind pursuit of brand.
"There is inadequate due diligence, and an assumption that name recognition . . . equates to quality investment management."
Transactions in a daily valuation environment have given rise to concerns by some plan sponsors.
In one session, both Nancy S. Gadberry, director, trust finance and compliance at BellSouth Corp., Atlanta, and Louise A. Fortin, director of pension investments at Textron, Inc., Providence, R.I., said their plans have started charging for transactions beyond a certain number in an effort to reduce the number of participant transactions.
"Trading is a concern. It is not a problem with monthly valuation, but it is for daily valuation," Ms. Gadberry said.
BellSouth charges transaction fees after a plan participant has made more than four changes in a year; and Textron imposes a fee with a participant's ninth change in a year to help offset additional expenses involved.
The issue of 401(k) plan expenses prompted discussion by and questions from the capacity audience.
Donald J. Butt, vice president of operations and defined contribution plans at U S WEST, Englewood, Colo., said, "We take fees very seriously and believe in keeping them as low as possible."
In addition, he said, U S WEST "always" discloses plan fee information to its participants by publishing "exactly what they (participants) pay in fees."
Peter A. Littlejohn, vice president, CIGNA Retirement and Investment Services, Cleveland, predicted that 401(k) fees will be lower in coming years than they are today.
"I expect over the next 10 years fees in 401(k) plans will be drastically reduced, primarily because people will start to run their plans as U S WEST," which leverages its 401(k) plan by using many of the same money managers as in its defined benefit plan.
"The bulk of (401(k) ) fees are for investment management," Mr. Littlejohn said. "I question whether everyone (plan sponsors) knows what their expense ratios are. But the expenses are coming from the investment management side of our life."
