The fire and ice of dragons in winter. Leprechauns sitting in a pot of gold at the end of the rainbow. This is the stuff of mythology. But even the seemingly commonplace can incorporate a dash of mythology as well, notes longtime industry analyst Warren Cormier – including DC plans.
Speaking at the recent Plan Sponsor Council of America (PSCA) annual conference, Cormier, Executive Director of the Defined Contribution Institutional Investment Association's (DCIIA) Retirement Research Center, dispelled a number of myths about DC plans – some commonly held, others less so. (Cormier is also a longtime NAPA Net columnist.)
The assumption of rationality – of logical coherence, whether reasonable or not – in the DC world. “That’s something that’s not really the case in the real world,” said Cormier. He cited the reluctance of some employees to participate in an employer-provided plan, and of some plan participants to make their contributions to their DC plans large enough to qualify for their employer’s matching contribution, as an example of irrationality.
Cormier said that loss aversion is a powerful force, citing a study that found that fear of losing money was felt two-and-a-half times more than the joy of gaining it. And even making a contribution to one’s plan can be seen as a financial loss – something that takes away the current ability to spend – unless it is properly framed, he told attendees.
DC plan committees make unbiased decisions. “We make decisions affecting others based on our experience of reality, not what we think of others’ experience,” said Cormier. There are two ways that groups reach sub-optimal outcomes, he said – incorrect orientation and group bias.
Groupthink. When like-minded people speak with one another, they are more likely to conform, said Cormier, adding that many people go along with the group regardless of their own views. In addition, he said, people defer to supervisors and experts.
But Cormier did suggest remedies for group bias. These include:
- including members from diverse disciplines;
- group size;
- adjusting decision-making tactics;
- having a member who serves as a devil’s advocate;
- a leadership style that ensures that all participate;
- seeking the input of outside experts; and
- reframing the questions to be answered.
Overconfidence. People have a tendency to overestimate how skillful they are and how successful they will be, Cormier argued. He added that hierarchical structures in organizations reduce the likelihood that anyone of lower rank will express concern over something that higher-ups espouse. Cormier suggested that one way to overcome overconfidence is to reframe the question.
Financial literacy programs are a simple answer. Cormier said that financial literacy programs can have unintended consequences. In one study, for example, people who scored higher on financial literacy tests tended to rate themselves lower regarding financial competence; conversely, those who scored lower rated themselves higher.
Similarly, financially literate individuals may erroneously assume that tasks that are easy for them are also easy for others. This, he suggests, may help explain why DC education often includes jargon and incomplete explanations of financial concepts. Cormier said that Professor Chip Heath of Stanford University has referred to this phenomenon as “the curse of knowledge”: educators don’t know what it’s like not to know what they know. He suggested that it may be helpful to avoid having highly financially literate people create a product’s educational materials.