401(k) Fears: What’s a Plan Sponsor to Do?
Sound investment decisions are rarely made under the weight of worry. The field of behavioral finance points to a number of cognitive distortions that feed on investor fear and can plague participants’ decision-making while compromising their retirement readiness. Here are some that can send shivers down participants’ spines — and ways sponsors can help them cope.
- Loss aversion and sunk costs. Many investors’ fears of realized losses surpass even the desire for gains — and can lead to holding onto underperforming
investments for too long, in the hopes of an unlikely rebound. - Herd mentality. Fueled by excessive FOMO, investors often tend to follow the crowd, which can potentially lead to asset bubbles or mass selloffs — and undermine portfolio performance.
- Fearful framing and the availability bias. The way financial information is presented to the public, especially in a clickbait-driven news media, can spook investors. A downturn framed as a “crash” evokes more fear than a market “correction.” The abundance of foreboding headlines can lead investors to overestimate the likelihood of negative events.
- Regret avoidance. The fear of future regret can paralyze decision-making, causing employees to put off enrolling in their retirement plan — or making adjustments to their portfolio. Consequently, participants may miss out on employer matches, tax advantages and the benefits of long-term compound growth.
Help Participants Fight Back Their Financial Fears
Financial anxieties can cast long shadows, but they need not darken participants’ retirement journey. With the right strategies, sponsors can help light the way to retirement readiness. Read the full article below!
