Status Quo Bias, Procrastination, Diversification
A status quo bias is explained simply as an individual’s inclination to stick with his or her current choices and/or patterns of behavior. Chuah and Devlin (2011) state “Sticking with the status quo involves less mental effort than considering more pro-active courses of action” (p. 458). The status quo bias is prevalent in the asset management industry sub-group.
Asset management firms like Fidelity, Vanguard, and Charles Schwab offer 401(k) savings plans to businesses. The asset management firm typically positions itself as a one-stop-shop for 401(k) plans. The asset management firm conveys how they can help save the business time and money by offering plenty of investment options, having record keeping systems, understanding industry, legal, and regulatory events, and providing data analytics to the business and plan participants (Fidelity Investments Institutional Services Company, Inc. …show more content…
Not only are Target Date funds simple to use, but they also carry a higher expense ratio for the asset management firm due to being actively managed. Of course, employees can opt out from using the Target Date fund if they are up to investing their own money.
Many 401(k) investors understand that they should diversify their portfolio. However, investors often do not know the difference between “sensible diversification and the naïve kind” (Thaler & Sunstein, 2008, p. 125). A special case of the diversification heuristic often used by investors is known as “1/n,” where an investor will split his or her portfolio even between “n” investments (Chuah & Devlin, 2011). Studies of the diversification heuristic have concluded that the set of investments offered in a 401(k) plan can have a drastic effect on the overall riskiness of an investor’s
A status quo bias is explained simply as an individual’s inclination to stick with his or her current choices and/or patterns of behavior. Chuah and Devlin (2011) state “Sticking with the status quo involves less mental effort than considering more pro-active courses of action” (p. 458). The status quo bias is prevalent in the asset management industry sub-group.
Asset management firms like Fidelity, Vanguard, and Charles Schwab offer 401(k) savings plans to businesses. The asset management firm typically positions itself as a one-stop-shop for 401(k) plans. The asset management firm conveys how they can help save the business time and money by offering plenty of investment options, having record keeping systems, understanding industry, legal, and regulatory events, and providing data analytics to the business and plan participants (Fidelity Investments Institutional Services Company, Inc. …show more content…
Not only are Target Date funds simple to use, but they also carry a higher expense ratio for the asset management firm due to being actively managed. Of course, employees can opt out from using the Target Date fund if they are up to investing their own money.
Many 401(k) investors understand that they should diversify their portfolio. However, investors often do not know the difference between “sensible diversification and the naïve kind” (Thaler & Sunstein, 2008, p. 125). A special case of the diversification heuristic often used by investors is known as “1/n,” where an investor will split his or her portfolio even between “n” investments (Chuah & Devlin, 2011). Studies of the diversification heuristic have concluded that the set of investments offered in a 401(k) plan can have a drastic effect on the overall riskiness of an investor’s