The Behavior Gap & Stable Value Funds
In our world of financial advising, arguably our most important work is protecting our clients from the "behavior gap". Stable Value Funds enable the behavior gap inside 401k plans.
What is "The Behavior Gap"?
Dalbar publishes a annual study looking at individual investors' investment returns over the most recent 20 years. They compare investors' average returns to what they could have earned if they were in a diversified portfolio and stuck with it over time. The numbers are appalling - the investor earns 3-4%/year when they could have earned 8-9%/year. The gap is around 5%/year. A disaster. Just 1% difference makes huge difference due to compounding.
What Causes the Behavior Gap?
It's a part of the human condition. We are emotional beings. Discipline is not a natural behavior. It's tough to stay put in a globally diversified portfolio through thick and thin even though we know, intellectually, it is the path to wealth.
What Role -- Stable Value Funds?
Stable Value Funds are a convenient way for 401k investors to act on their fear. Plans with Stable Value Funds enable this behavior - like placing a TV with a Bowl game playing in front of college football fanatic like me when I ought to be exercising. :) It encourages bad behavior and is a disservice to the plan participants.
Behavior Gap & Carl Richards
More Points about Stable Value Funds
One might argue that Stable Value Funds are a replacement for fixed income (ie. bond) funds. While they could serve as a replacement - our opinion is that they are a poor replacement. They are often not transparent and there is a 90-day delay to get your money out of the fund.
A Simple Way to Describe Good Investing Practices (that avoid the Behavior Gap)
There are two mistakes you must avoid to be successful growing wealth long term:
1) Lack of Discipline (stay in market, don't chase fads, don't time the market)
2) Lack of Diversification (diversification mitigates risks that are not necessary risks for long term growth. You need diversification across asset classes, regions etc, and within asset classes, regions, etc.)
A good advisor will coach and counsel you so that you do not make either of these two mistakes.
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Common Mistakes
The biggest mistake we see is plan sponsors not taking a few moments to understand the difference in the status quo and a plan structure that includes an ERISA 3(38) advisor as we offer. The improvements are vast. When you move to a clean transparent plan that includes an ERISA Section 3(21) and 3(38) advisor - and eliminates 12b-1 fee paying mutual funds - then all the problems occurring inside 99% of the plans, that the DOL Regs attempt to fix just disappear. Plan sponsors that have these type of "clean" plans will have a much easier time dealing with the 2012 regulations. Your fee disclosure to plan participants is simple, clean and reasonable.
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What to Do Next
Problem Solved: Use an ERISA Section 3(21) independent advisor (RIA) that insists on bringing an ERISA Section 3(38) independent advisor (RIA) with them. They both have strict disclosure requirements built into their licensing so that complete transparency is the norm from day one. They'll be watching each other as well as the TPA, record-keeper and custodian, that are also independent. Multiple checks and balances - a fiduciary wouldn't have it any other way. Call us at 760-804-0910. Newsletter Archive
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