Spoilt for choice. That’s us. Consider, for example, the barista-in-a-box coffee machines that are all the rage – the ones that use those little coffee capsules. The array of choices available is not only confusing, it’s terrifying. What brand should you choose? Should you choose proprietary capsules, or the open standard ones? What model should you choose; the one with or without the milk frother? What flavour capsules should you choose; vanilla, chocolate or just plain coffee? Too many choices, too many decisions. The anxiety of making the right choice often paralyses us into making no choice at all.
Unfortunately this paralysis also often extends to our financial planning. Within the safety of old school defined benefit (DB) retirement funds we didn’t have to concern ourselves with the risk and consequences of making the wrong investment choice – that was the worry of the fund’s trustees. Today, defined contribution (DC) funds dominate the retirement fund landscape, confronting members with real life-impacting choices. Choosing the wrong coffee machine might not have serious consequences, but making a wrong investment choice can impact your future severely.
With many South African DC funds having come to life in the early 1990’s, we’ve had enough time to see the danger of being spoilt for choice. Many DC funds offer life stage arrangements where members pass through risk-profiled portfolios based on their age. In the few cases where DC schemes do offer member choice between three or four risk-profiled portfolios we have seen young members choosing to be in the lowest risk cash portfolio because somebody told them that the market is “too hot” and will come crashing down soon. Fast forward 10 years and they still sit in the lowest risk portfolio and, having failed to convert time into money, their futures look dim.
I have witnessed this feeling of paralysis when we arranged a group personal pension scheme for our UK staff and had sight of all the different investment choices. I counted them: 105 spread over all types of asset classes, sectors and regions. How can you expect a 25-year old to understand the difference between a Far Eastern fund and Japanese Equity fund, let alone expect them to make a choice of what percentage they want of each?
Too much choice is not a good thing, and often results in members arriving at retirement age with less capital than they would have in the old defined benefit environment. Defined contribution plans were considered a major innovation when they came onto the market. But as time has gone by it appears that for the vast majority of fund members too much choice is simply baffling and results in them either making the wrong choice, or making it once and never re-visiting it. In my view, it’s time for another wave of innovation in the retirement fund space, one that simplifies choice while still offering members the best possible outcome. This is a big ask; but in a country where only 6%-9% of retirees have sufficient capital to live on, while the rest fall back onto family or the state, it’s a national imperative.
In the meantime, trustees of DC plans – those who provide the choices – have a moral responsibility to provide more guidance to members when making the most appropriate choice. And members have a responsibility to themselves to spend more time looking at fewer choices. In the longer term less is more.
– Petri Greeff
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Please contact Petri Greeff via email or on +27 (0) 21 673 6999.