Lipper Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN - Funds in 401(k) Plans
Q. Don, last week you were in Washington for a big annual funds-industryconference?A. Right, the Investment Company Institute.
Q. Anything interesting to report?
A. Yes. I thought the most important sessions were about how to getemployees to enroll in their 401(k) and similar plans to invest for thefuture.
Q. Roughly what percentages of eligible people are already participating?
A. That depends on exactly which survey you read, but somewhere in the 70%range seems to be the most common estimate.
Q. So, almost one-third of people who could participate, do not?
A. Sadly, yes. Participation seems to correlate positively with age andincome levels, and a lot of young people who could benefit from more yearsof compounding are not getting that help.
Q. So, the conference actually had some sessions on what to do?
A. Right. A Harvard professor, David Laibson, gave some really insightfulcommentary on the research findings.
Q. What did he say?
A. Procrastination is the chief problem. Also, people naturally prefer funnow over doing good things that will help them in the long run--thechocolate cake versus the diet.
Q. What ideas were suggested for getting more people to enroll in theseplans?
A. There were several. And these are things I think business owners shouldconsider and employees should put on pressure for adoption:
- Automatic enrollment of new people
- Automatic deduction of a percentage that maximizes the employer'smatch
- Automatic annual bump-up of employee percentage contribution
- Automatic default choice of an appropriate fund, given the employee'sage
Q. "Automatic" seems to be the key word there...
A. Right. Some HR people on a panel showed that initial enrollment jumpsover 20% when it is done automatically.
Q. But, don't we need to give people in a free society the choice not toenroll?
A. Sure, and it is easy to "opt out." But you get most people staying in ifyou put them in, rather than if you require them to make choices and join.
Q. Talk a little about that "automatic bump-up" idea.
A. Quite often when a person starts making contributions, it would bepretty painful to max out the deduction at 10% or more immediately, sinceit decreases take-home pay. The idea of an automatic annual bump is toraise the contribution fairly painlessly, say by 1% or maybe 1.5% a year.Again, if you do it automatically more people will benefit than if yourequire them to remember and do the paperwork themselves each year.
Q. What is the most "appropriate" fund choice in a plan?
A. Well, the trustees and lawyers will figure that out in each plan,usually based on employee age. But in the past the default option, since itseemed the safest, was a money market fund.
Q. And they don't earn very much!
A. Exactly. And since it has been observed that more than half the peoplewill never change their allocations, a money fund will lose them a lot ofpotential wealth if they stay there. So, things like funds that arerisk-matched to age are becoming more-common default choices--likelife-cycle funds, which we have talked about before.
Q. Why do people seem to need so much help?
A. We and our listeners really like the investing world, but an awful lotof people are scared by it and feel unable to make choices when there is alot of uncertainty. Wall Street certainly does involve uncertainty!
Q. Seems like a lot of companies might hesitate to make all these automaticrules, in case someone sued them.
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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
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