GuidePost - Vol. 4, Issue 1 2008

The GRABot BAG
by Sherrie E. Grabot, CEO

January 2008
Decision time: Football, politics, and the economy
With big game XLII looming, most Americans probably know more about the opposing teams’ strengths, possible weaknesses, the quarterback’s sore foot, and of course the upcoming advertising spectacle than they do about, say, the world economy. But how many sports fans are actually confident enough to judge the point spread and put some real money down on the outcome of the game?
                                                                                       
To take a more serious example, most people probably know more about the candidates in their party’s primary election than about the credit crisis. There’s certainly been enough in-depth media coverage, down to the slightest misstatements and the smallest wardrobe details. And yet, with Super-whatever Tuesday just around the corner, many voters are still unconvinced and undecided (according to both national polls and local water-cooler discussions).

Now, how much does the average consumer really know about the economy we depend on for our livelihoods? With all due respect, about three things: The stock market has dropped like a rock; the government is trying to fix it with interest rate cuts and tax relief; and it all has something to do with an epidemic of risky mortgages. Enough information to log on to your 401(k) and panic, right?

Even to make an educated guess about the markets in these troubled times, you’d have to know a lot more than you could learn from the evening news. How damaging is the crisis of risk involving collateralized-debt obligations (CDOs) and structured investment vehicles (SIVs)? If certain bond insurers default, how many  more billions will banks write down? Are the Asian markets in fact decoupled from ours, and to what extent? Do central banks still have the power to fight off recession? (There is no answer key, but some of the questions at least are here.)

Baffling betting behavior
Yet many of the same folks whose eyes glaze over at the mention of monetary policy are even now tinkering with their retirement plans. Get out of stocks before the bottom really drops out, or double down and buy more now? It’s a classic example of human irrationality that wagering much of your life savings on long-term market timing is somehow easier than betting a hundred dollars on the Sunday game.

Of course, the key idea here is “long-term.” Any competent financial advisor would tell 401(k) investors to keep their eyes firmly fixed on the time horizon. We providers have a responsibility to tell our participants the same thing. For most investors, retirement is far enough away, and will last long enough, that the best advice is simply to stay the course, stick with your plan, and try to ignore the news. 20 years from now, you’ll hardly remember the credit crunch of 2007-8, and chances are your retirement account won’t be much affected, either.

The future is an approximation
This is one area where technology can be very helpful. An online managed account solution, or for that matter, an automatic account based on lifestyle or lifecycle funds, can be set to show participants their account balance in the future, rather than right now. Over a longish time period, calculations based on contribution rate, asset classes, end date, and historical averages will be remarkably accurate – regardless of whether the Dow lost 1% or 10% last week.

If everybody had access to a managed account provider, and the default setting was to view future account balance, the gyrations of the markets might not make such big headlines every day. But until they do, all those financial service commercials on Superbowl Sunday should include a new disclaimer, like the one used when other risky stunts are shown: “Actual investment decisions made by trained professionals; do not attempt.”

~~ Sherrie

Learn about the new QDIA regulations
How are default plan investments defined? How much design flexibility is allowed, and how will providers respond?

Join our CEO, Sherrie Grabot, for a panel discussion titled
Kicking the Tires Part 2: Managed Accounts.
Plan Sponsor Summit on QDIA-Qualified Default Investment Alternatives
March 31, 2008
The Harvard Club, Boston
12:45-1:45 PM