“For instance, where members have choice of investments and flexi benefits, they often make inappropriate investment choices.”
Poor communications and lack of advice can impoverish retirees
Even the most sophisticated retirement planning strategy can have its Achilles heel – and this is usually poor communication.
Take the following illustration: Professor Shlomo Bernatzi (UCLA), a leading authority in Behavioural Finance, performed an experiment. “We asked two groups of Morningstar.com subscribers to indicate how they would allocate their retirement funds among a hypothetical list of eight funds.” The first group was presented with a form with four lines on it, though the participants could easily select additional funds by clicking on a highlighted link, with these instructions: “Based solely on the above, please indicate how you would allocate your retirement contributions. You may choose up to four funds. (If you would like to elect more than four funds, please click here.)”
The second group of participants was shown an election form with eight lines on it. Despite the ease of simply clicking on the link, only 10% of the subjects with the four-line form selected more than four funds. In contrast, 40% of those viewing the eight-line form picked more than four funds.
Bernatzi’s argument is that in communicating with people, an author is prone to make certain assumptions that, in fact, hold no validity.
“The first implicit assumption is that households have the cognitive ability to solve the necessary optimisation problem. The second implicit assumption is that the households also have sufficient willpower to execute this optimal plan. Both of the implicit assumptions are suspect,” he says.
As accountants – many of us being involved in company retirement funds as an executive, member and trustee, or auditor – the lesson we must take heed of is that most members do not understand their fund benefits.
For instance, where members have choice of investments and flexi benefits, they often make inappropriate investment choices. How does one choose between so many investment options? Does one choose investments based on age?
We also see members inappropriately cashing out their withdrawal benefits, even paying the tax penalty, resulting in an impoverished retirement. Apparent reasons range from instant gratification, ignorance or servicing high levels of personal debt. The real reason is lack of advice.
Trustees are placed in an unenviable position as custodians of a fund as, historically, growing regulation focuses their attention on the fund fiduciary obligations rather than to member education. Trustees need to educate members about how ‘life’ and their fund benefits fit together and to recognise that communication is more than annual benefit statements. It may require re-designing a form and communicating the right behaviours.
For employers, a proactive communication strategy that addresses the real issues faced by employees can result in a smiling workforce.
Author: Mike Lledo CA(SA) is the CEO at Consolidated Financial Planning.