Participant Inertia Key to Understanding Behavior

March 6, 2006 ( - Defined contribution participants face the investment markets hampered not only by their own "counterproductive" investing style, but also because of "inadequate" plan design, a new study asserted.

A news release from AllianceBernstein said that the report by Shlomo Benartzi, associate professor and co-chair of the Behavioral Decisionmaking Group at The Anderson School at UCLA, claims major hurdles to stepped-up participation and deferrals are the lack of investor action (inertia) and the innate behavioral factors that encourage participants to undermine their own investment success.

Many eligible American workers who could participate in a company-sponsored retirement plan do not, and inertia may be to blame. When non-participants are surveyed they often state their intentions to begin saving in the future, but an overwhelming majority of them never do.

Also listed as roadblocks are that:

  • employees are apparently more comfortable simply allocating their investments evenly across the fund options presented to them within their defined contribution plans.
  • when employees are presented with increased investment choice, they are more likely to not participate or to select the lower-risk alternatives available to them.
  • employees investing too much of their retirement savings into their own employer’s stock is an extreme example of poor planning and diversification.
  • employees chase hot performers.
  • once a participant makes a selection, they tend to stick to it.
  • investment professionals are just as likely to use mental shortcuts that lead to the same mistakes time and again.

The report said that among the items that could strengthen plan design enough to boost plan activity are automatic enrollment, automatic savings rate increases, and target-date retirement funds.

The report is here .