Loss aversion sounds like a good thing — trying to avoid losing. What could be wrong with that? Unfortunately, if taken too far, it can actually be a threat to retirement plan participants’ long-term financial health. Loss aversion is the tendency to prefer avoiding potential losses over acquiring equal gains. Essentially, we dislike losing $20 more than we like getting $20. Yet, this common bias can come with a heavy cost.
Excessive risk avoidance can hurt participants when, for example, it keeps their money out of the market and tucked away in low-risk, low-interest savings accounts — where purchasing power can be eroded by inflation over time. Delaying enrollment in an employer-sponsored retirement plan due to fear of market downturns can cripple opportunities for future growth.
Loss aversion can also lead to undue stress and anxiety. Participants stay invested, but worry constantly, which can create health and other problems. Finally, it can result in short-sighted decision making, causing participants to jump ship during volatile markets rather than staying in for the long term. All these things can greatly compromise retirement preparedness.
Fortunately, the fact that people are susceptible to loss aversion doesn’t mean they have to succumb to it. It’s especially important not to do so during periods of high market volatility. Here are five things you can recommend your participants do to fight the fear.
- Understand it. Merely knowing about and identifying loss aversion tendencies can give greater insight and conscious control over decision making. Your participants should consider the potential consequences of loss aversion before making important financial decisions.
- Take the long view. Maintaining a long-term outlook on markets can be helpful. Let your participants know they should look at historical trends and how investments have performed over extended periods of time. Otherwise, it’s just too easy to get caught up in the latest financial fear mongering on the nightly news.
- Don’t obsess. If the daily ups and downs of the stock market make your participants’ stomachs turn, suggest trying to limit account reviews to quarterly performance reports.
- Get an outsider’s perspective. Your participants should consider speaking with their BerganKDV retirement plan advisor. The advice of an expert with more experience and greater objectivity can help your participants keep perspective. A BerganKDV advisor is available by phone at 1-844-674-401k or by email at retirement@bergankdv.com.
- See the big picture. Take a balanced view of the overall economy, which comprises a lot more than stock market performance. Factors like increased growth, low unemployment and low interest rates are all favorable economic indicators during periods of volatility.
No one likes to lose, that’s for sure. It’s perfectly normal to prefer upswings over downturns, but the lesson is to not let fear take hold when it can compromise financial decision making and hurt long-term best interests.
ACR#313021 04/19
We are always willing to assist employers in any way we can. If you would like to find out more about our services and how they can benefit you and your employees, please contact BerganKDV Retirement Plan Consultants.
The “Retirement Report” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent.
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