Several themes permeated panels on risk management, plan design, fee structures, stable value and retirement income at Pensions & Investments' West Coast Defined Contribution conference.
Keynote speakers at the conference, held Oct. 24-26 in San Francisco, included Robert C. Merton, professor at the Massachusetts Institute of Technology's Sloan School of Management and a Nobel laureate in economics, and Don Ezra, co-chair of global consulting at Russell Investments.
One theme was the frustration of defined contribution plan executives and service providers in finding ways to install lifetime income options into DC plans. That's because such options need to be attractive to participants and comfortable — from legal, fiduciary and cost standpoints — for plan sponsors.
Industry professionals also expressed exasperation about participants' poor savings behavior and investment practices as well as their disappointment that education efforts haven't achieved the desired results.
Mr. Merton lamented that as defined contribution plans have been transformed from supplemental savings plans to “the main legal format for retirement,” participants haven't been equipped in the past to deal with the extra responsibility — and he worries that they won't be equipped in the future.
He used a medical analogy: Imagine being wheeled into a hospital operating room where the doctor asks how many sutures you want. Mr. Merton said his reply would be, “I don't know,” underscoring his belief that participants lack adequate knowledge to achieve the “complex optimization” of investing decisions. “I don't care if they have an IQ of 180,” he said.
Mr. Merton, co-winner of the 1997 Nobel memorial prize for economics for his work in determining the value of derivatives, said retirement planning and investing require participants to examine more than just their DC plan accounts. They must factor in Social Security, defined benefit plans and other assets such as personal savings. He said a retirement plan should be scalable, robust and effective, recommending that such a plan could be best achieved by professional management rather than left in the hands of participants.
Mr. Ezra picked up the education issue, stating that investment education has a “zero chance” of making the average person an expert investor.
The DC model confuses financial education — which Mr. Ezra described as learning about budgeting, savings and credit — with investment education.
“Financial education is the meat and potatoes, and investment education is the icing,” he said. “We are feeding people a lot of icing and hoping they'll be healthy.”
Mr. Ezra counseled plan executives and participants to step back, stop trying to optimize every investment decision and practice “satisficing” behavior — which essentially means set a realistic standard, find a solution to meet it and be happy if you do.
Satisficing isn't a new concept: The term was coined by the late Herbert Simon, a Carnegie Mellon University professor whose research ranged from economics to computer science to psychology. He won a 1978 Nobel prize in economics for research on the decision-making process within economic organizations.
“We should make a conscious effort to de-emphasize optimization,” Mr. Ezra said. Otherwise, investors and plan officials will continue to obsess over optimization, spending an inordinate amount of time, effort and money looking for the perfect solution, he said.