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By Christine Benz | 08-10-2011 08:48 AM

Investors Need to Focus on Meaningful Decisions

Nobel laureate Robert Merton thinks investors should worry about big-picture items, such as how long they want to work, and leave the details to professionals.

Christine Benz: So, in terms of tweaks, or I guess you would say major adjustments that you would make to try to deliver better outcomes for 401(k) participants, it sounds like being holistic and considering the person's individual situation is very important. Also communicating with the participant about whether he is close to this goal or is not close, engaging that participant to the extent that he or she would like is also part of how you envision these plans ultimately evolving?

Robert Merton: Well, that's a good question. I'd like to answer it in two parts because I first want to say that there is a lot of talk about engaging the participant now that they have to make to decisions. We often hear extreme saying that the most important thing is to get the individual engaged, so that they make decisions. I would modify that to say the most important thing is to get them engaged if the result of that engagement is to improve their chances. It is possible to get people engaged where they will make decisions that actually make them worse off than they were.

Benz: Absolutely.

Merton: So that's an important factor in the element. The main point on engagement, because I think this is critical to understand for this application, is that people generally don't get engaged in our financial affairs. We don't even think about them or do anything about them sometimes for years at a time. Or we're sporadic about it. So, quite aside from everything else, any system of a solution, in my view, that the participant has to participate in order to make it work, I feel is flawed. It's very risky because people don't do it.

We have evidence over and over again, and if we design a system predicated on assumptions that we can get people to regularly do the right thing, as a linchpin to that solution, we're making an enormous assumption which I think is very risky. It's a little bit like saying in a different domain, the way to solve the health and obesity problem in the United States is for everybody to get up every day and do an hour-and-a-half workout. That might be true, but it's not going to happen.

It's very important that when we put in what we claim to be a solution that it work and that it work well. And so one of the design criteria for any effective solution, in my view, is it has to be really good even if the individual is not involved. And what I mean by "involve," I mean not even telling you information about themselves.

So, the first rule is it ought to work well without having to engage the individual. Now, we've designed something to do that.

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