Assignment 10 - Communication, Investment Advice and Other Participant Services Flashcards
- factor resulting in bad choices
- term used for putting too much emphasis on past performance as an indicator of future performance, particularly of a mutual fund
overweighting past performance
(factor resulting in bad choices)
a lifecycle fund that maintains a fixed-asset allocation
in aggressive, moderate, conservative models
static allocation funds
- factor resulting in inactivity on part of indiv. managing their own inv.
- overemphasize immediate desires and rewards at the expense of their L/T needs
- the tendency, when faced w/ uncertainty, to sharply reduce the importance of the future in the decision-making process
- importance of the future is just not given the weight we think it should today.
hyperbolic discounting
(factor of inactivity)
the term for a person or corp. that exercises any authority or control of mgmt, disposition of assets, or admin. of a benef. plan
exp: officers, directors, inv. mgrs
fiduciary
**the practice involves a requirement that an indiv. must become a plan member when initially elig. unless the indiv. files a request to be excluded from the plan (opting out)
**need default investment option (QDIA)
automatic enrollment
**an inv. fund that is invested based on the anticipated retirement date
- asset allocation changes as it approaches set retirement date
- retire near future = invested in bond funds
- retire in 40 years = invested in equity funds
targeted maturity funds
target retirement date
(life cycle funds)
- why participants don’t behave as rational ppl should or at least how we think they should
- use scientific research techniques to understand social, cognitive and emotional biases that affect econ. decision making
- indiv. make decisions w/ incomplete info, likey to be influenced by the way the decision is presented, and make suboptimal choices as a result
- heuristics
- framing
- mkt inefficiences
Behavioral Finance
belief that ppl will follow their “rules of thumb” or shortcuts or “old wives tales” w/o rationally analyzing them
decisions often fall short of the optimal positive determinations suggested
Heuristics
(behavioral finance)
belief that the way that something is positioned, or the setting can influence the behavior (decision)
outcome then is less than optimal
decisions appear to be more susceptible to manipulation
Framing
(behavioral finance)
belief in explanations that address why we don’t follow the path that mkt efficiency would dictate
Market Inefficiencies
(behavioral finance)
- Loss-averse
- hyperbolic discounting
- procrastination
- status quo bias
- complexity
- choice overload
Factors of inactivity
- bounded rationality
- overweighing past performance
- savings anchors
- investor overconfidence
- peer influence
- inapprop. risk disctng
- disposition effect
Factors resulting in Bad Choices (suboptimal active choices)
**for example = ER Stock
- factor resulting in bad choices
- investors underestimate the risk of certain inv.
- EEs figure that they know the comp.
- think it will always will even if the industry doesn’t
- that isn’t necessarily true.
inapprop. risk discounting
(factor resulting in bad choices)
- factor resulting in bad choices
- an effective way to avoid facing the reality that there is a loss in the inv. - until i sell it, there is a chance it will come back.
- opposite = unwillingness to sell a winner
Disposition Effect
(factor resulting in bad choices)
ways to evaluate lifecycle/targeted retirement date funds
- retirement age groupings - most common is 5 years
- asset allocation - at each age group
- flight plan/glide path - over time, how does the plan change asset allocation
- retirement - what then happens to fund asset allocation
fiduciary has duty to discharge all responsiblities solely in the int. of the partic. and benef.
w/ care, skill, prudence and diligence that a prudent person who is familiar w/ such matters would use under the circumstances then prevailing
Prudent Expert Rule
- trans. b/w plan and party in interest or a disqualified person
- sale, exchg or leasing of prop.
- lending money
- furnishing goods, servies
- transfer or use of plan assets
- acquisition of ER securities beyond set limits
prohibited transactions
- any plan fiduciary
- person providing serv. to plan
- any ER or EE org. whose EEs/members are covered by plan
- direct or indirect owner of 50% or more of ER
- relative of any of the above
- officer, director
- person having 19% or more ownership interest in any of the preceding
- EE is a party-in-interest, not a disqualified person
disqualified person
(2) types of lifecycle funds
- static allocation
- target retirement date
- diversified fund
- no ER securities
- no penalty for transfer out of QDIA
- must be:
- target date or life cycle fund
- level of risk appropriate for partic. of plan as a whole (balanced fund)
- individually managed acct based on partic’s age, retirement date, or life expectancy
qualifed default inv. alternative (QDIA)
(3) objectives for EE benef. comm
- adhere to rptg and discl. requirements
- support EE benef. cost-containment strategies
- support HR recruitment and retention objs.
responsibilities of a fiduciary
- discharge all duties solely in interest of partic. and benef. for exclusive purpose of providing plan benefits.
- prudent expert rule
- diversify inv. to min. risk of large losses
- must conform w/ docs governing the plan
- must invest only in assets subj. to the jurisdiction of U.S. courts
(4) types of inv-related information that ERs can provide w/o fear of fiduciary liability
- general plan provisions
- general fin. and inv. info
- asset alloc. models
- interactive inv. material
- factor resulting in inactivity on part of indiv. managing their own inv.
- indiv. suffer more remorse as a result of losses than they experience satisfaction or pleasure for thier gains
- don’t rate gains and losses equally, on avg
- therefore, it is a challenge from the start to convince indiv. to save for retirement due since they are more concerned with the current losses than the buildup of retirement funds
loss - averse
(type of inactivity)
- factor resulting in inactivity on part of indiv. managing their own inv.
- delay making decisions and have difficulty once they delay a decision to take action to chg their course or direction
procrastination and inertia
(type of inactivity)
- factor resulting in bad choices
- odds against making optimal choices are formidable due to limitations regarding their mental capabilities
Boudned rationality
(factor resulting in bad choices)
auto-enrollment features address these issues
- low deferral rates by NHCEs
- non-defferal by new EEs
- non-deferral by current EEs
- difficulty in passing the ADP/ACP test
