Retirement Planning: Are You Acting on Your Own?

Your ability to make the choice of which investment to purchase depends on who you listen to. You may think you are an independent thinker, willing and able to parse all information available to you in a way that complies with who you think you are. But psychological experiments prove otherwise. Faced with which investment in your 401(k) portfolio (we'll use this tax-deferred retirement account in part because most of us have access to them and only some of use them well) you will invest in what someone else has told you to invest in.

You may think you are acting independently. But experiments have shown that you will act against your own morals or perhaps better judgement) in many instances. Consider this: if you are a long-time reader of what I have written over the years, you have grown to disdain annuities and repel target date funds.

You know that I think annuities are a product that costs too much and despite the peace of mind it might offer you and yours, you could do better on your own in something just as conservative without involving an insurance company.

You know that I am not a fan of target date funds in part because they are not all created equally, do not have a good track record that suggests they can do as advertised and if they fail to do as advertised, you might have missed a decade or two of substantial portfolio gains because of it.

So as a non-fan of those two products (there are others but for the sake of this discussion, we'll keep to products you are most likely to confront at some point in your financial lives - target date funds in your 401(k) and annuities at the end of your career), you might think twice about what these offer and if they will do what they suggest they will or I have claimed they might.

Yale University psychologist Stanley Milgram measured the willingness of study participants to obey an authority figure who instructed them to perform acts that conflicted with their personal conscience. While some of his experiments seemed somewhat abusive, they drove home the point that once confronted by the voice of authority, you will not follow what you know is right.

Consider the Halloween experiment for a moment. A trick-or-treater is told by the person answering the door to take one piece of candy and after instructing them of that, leaves the room. 34% took more than one. But put a mirror with the candy and the number of children who took more than one piece despite being directed not to, dropped to 12%.

We are subject to influences even if the person who is influencing us is the person in the cubicle next door or the neighbor across the street. You have no idea whether either of these tow people are lying when they reveal their investment secrets - and most people understanding that fact do in part because there is no moral obligation to tell the whole truth (which might be that they have a great 401(k) balance but huge credit obligations). They speak with authority and looking for guidance, we gravitate towards their expertise.

Your level of intelligence has little to do with it. So what do you do knowing that you are susceptible to suggestions that may go against what you know might the opposite of what you think you stand for? Professor Milgram suggests the following (from Wikipedia):

The first is the theory of conformism, based on Solomon Asch conformity experiments, describing the fundamental relationship between the group of reference and the individual person. A subject who has neither ability nor expertise to make decisions, especially in a crisis, will leave decision making to the group and its hierarchy. The group is the person's behavioral model.
The second is the agentic state theory, wherein, per Milgram, "the essence of obedience consists in the fact that a person comes to view himself as the instrument for carrying out another person's wishes, and he therefore no longer sees himself as responsible for his actions. Once this critical shift of viewpoint has occurred in the person, all of the essential features of obedience follow".

Here is the difference between authoritarian expertise and common sense. If you are told by someone that such-and-such an investment is a good choice, that they have it and have been thrilled by the performance, their authoritarian tone will suggest that you need to do very little research because they have and they have given it their stamp of approval. You have absolutely no idea whether they are going to sell it tomorrow because whatever the investment was, it has run its course. And they have no obligation to tell you.

If a mutual fund suggests that it has a trillion dollars worth of investor dollars under its management, the perception is that there are a lot of people who trust the managers authority to do the right thing. But suppose that money - which we always think does the right thing even if the sell on the downside and buy on the upside - is doing only what the previous person has done. Think Ponzi. Think Madoff.

So what do you do? The morally correct choice is relatively simple when it comes to investments for retirement. You will one day retire and that means you are dreaming of a day when you will no longer work. You may live 20-30 years after that moment and you will need to finance that time. You will need to explore how you will spend that time and how you will pay for it.

You will need to put money away. I can say that you need to contribute the maximum amount the law allows to that 401(k) account, but you won't. You will feel bad because you haven't and in many cases simply work longer to make up the shortfall. But you know you need to invest more than you are.