New research suggests that the more mutual funds your 401(k) offers, the more likely you are to take the easy way out to escape the mental gridlock.
The typical 401(k) has seven mutual fund investment options, but some have as many as 21 funds. We may think we like choices, but behavioral research has shown that people simply can’t handle so many options – that’s why some employers have turned to auto enrollment in their 401(k)s or picking investments for workers who can’t or won’t make the decision.
A new study building on prior research finds that the more investment options an employee has the more likely he or she is to simply divide the money evenly among those options. This can potentially reduce the diversification in employees’ retirement portfolios, with long-term consequences.
“We find that considering a larger number of funds to invest in may be overwhelming for many investors,” said the research, by Gergana Nenkov and colleagues at Boston College, as well as Rutgers University, the University of Pittsburgh, and the University of Texas, Austin. Splitting the money evenly is how we cope.
“We just don’t have enough capacity to sift through the options that are out there,” Nenkov explained in an interview. Employees aren’t financial experts, and asking them to make these decisions is often “too much,” she said, and may even be “making us unhappy.”
The focus is on 401(k) choices in this study, recently published in the Journal of Marketing Research, But the argument may apply to the proliferation of all kinds of complex financial products, including credit cards charging different rates for balance transfers, purchases and cash advances, as well as debit cards with hidden fees and mortgages with complicated terms.
Multiple products act to prevent consumers from comparison shopping. But the demise of the defined benefit plan and the sudden responsibility thrown on employees to manage tens or hundreds of thousands of dollars in their personal investment portfolios is clearly more than many of us can handle. Don’t feel bad either – Nenkov, who has a PhD in marketing, admits to feeling overwhelmed by the choices. (As does this blog writer.) …Learn More
Married couples have up to 567 options for deciding when and how to file for their Social Security benefits. Yes, 567!
“They are faced with a bewildering array” of choices, said David Freitag, vice president of Impact Technologies Group Inc. in Charlotte, North Carolina, which just released a spiffy, user-friendly Social Security calculator to help.
No wonder people just throw up their hands and claim their benefits at 62, when they first become eligible. But in the midst of the baby boomer retirement tsunami, oodles of calculators are coming online to simplify the decision for couples. Impact is offering a 14-day free trial to anyone who wants to test its calculator.
Couples’ strategies have become more complex, because today’s boomer wives have spent a lifetime working and because they may earn wages rivaling or exceeding their husband’s, said Jim Blankenship, a financial planner in New Berlin in central Illinois. There is also more money at stake in making the right decision, he said.
“Before, it was much easier to have a rule of thumb to go by,” he said. “The decisions are different than what they used to be.” …Learn More
Perhaps because our summer vacations are over and it’s time to increase our 401(k) contributions, Squared Away is on a jag about saving money.
Amitai Etzioni is one of the last old-school public intellectuals. He hasdone everything from writing 24 books to serving in the Carter White House and currently directs George Washington University’s Institute for Communitarian Policy Studies. But this video captures the wisdom of an 83-year-old man who taps deeply into the psychology of money in the 21st century.
Etzioni also wonders why, when he suggests his prescription to people, they “get angry with me.”
Since everyone is unique – and uniquely motivated – you may prefer a video that ran last week.
To support our blog, readers may also want to sign up for our e-alerts – just one per week – by clicking here. And there’s always Twitter!Learn More
Single people can receive tens of thousands more from Social Security over many years of retirement and couples can receive nearly $125,000 more by waiting until their late 60s to sign up.
The most common age for starting up Social Security is 62, when individuals first become eligible, even though monthly benefit checks would rise sharply if they’d wait. But it’s becoming increasingly worthwhile financially to hold out, according to economist Sita Nataraj Slavov of the American Enterprise Institute, who presented her research findings at the Retirement Research Conference in Washington last month.
This contradicts the conventional wisdom that no matter when people file, they’re going to essentially receive the same total amount over their entire retirement. The trade-off has always been between filing early and receiving a smaller check for a longer period of time, or filing later and receiving a bigger check for fewer years. Financially, it’s a wash.
But an economic fluke has changed all that: historically low interest rates. Slavov and co-author John Shoven, a Stanford University economist, have determined that, increasingly, there’s a payoff to holding out in this unusual rate environment. (More later on how that works.)
“There’s real money at stake here. This is not a trivial amount for most people,” Slavov said in a telephone interview. “What we’re trying to communicate is, it’d be good to think more about what you’re giving up when you claim early.”
At Squared Away’s request, Slavov calculated the present values for retirees who file for Social Security at the age at which they would maximize their benefits – she did so for the average single man, single woman, and two-earner couple. The payoff is largest for married couples who delay filing for benefits: …Learn More
Most financial advisers give troubling advice to married couples about when to claim their Social Security benefits, advice that can substantially reduce the wife’s income during retirement.
Social Security rules generally make it more beneficial for the higher-earning spouse – usually the husband – to delay signing up for his benefits well past age 62. By delaying, he boosts the size of his monthly Social Security check, automatically increasing his wife’s “survivor benefit” after he dies. This holds true for most couples, whether the wife works or not.
A new survey of U.S. financial advisers provided them with hypothetical couples’ situations and asked how they would advise them on when to start receiving Social Security. For the couple in excellent or average health, only 20 percent recommended “that the man delay claiming as long as possible.” This advice leaves most widows with a substantially smaller monthly benefit for years or even decades.
The survey’s finding demonstrates “the lack of understanding of both the benefits of delaying and the compounding factor it can have on the spouse,” said Lisa Schneider, research director for Greenwald & Associates, a private research firm that conducted the study with researchers at the University of Pennsylvania. …Learn More
Famously known as the brain’s “feel-good chemical,” dopamine is no longer associated only with thrilling activities: it can have the opposite effect.
Past research has linked dopamine to risk-taking – it can explain the thrill of sky-diving or venturing out on the Grand Canyon’s glass-bottom walkway. But new research on the brain has uncovered dopamine’s role in the tendency of people to avoid risks. The new findings, by Harvard Medical School researcher Michael Treadway and colleagues at Vanderbilt University, have implications for all types of human behavior – including whether we’re willing to take financial risks.
Different people exhibit “different appetites for a certain amount of risk and how they experience risk and how gun shy they are,” Treadway said. This may depend on where the effects ofdopamine take place in the brain.
That’s a dopamine molecule. We typically talk about financial behavior and psychology or use terms like motivation and decision making. The truth may be hard to grasp, but it all comes down to gooey chemical interactions in our gray matter. … Learn More