Math is hard for most people and numbers are not the most intuitive way for people to make decisions. No wonder that participants in 401k and 403b plans have such a hard time making good investment decisions. A plan sponsor attending a TPSU program at Notre Dame explains how the record keeper for her plan which cover 500 employees uses color coding of their fund options to help.
Their provider, John Hancock, color codes investments on their enrollment form with aggressive funds in red, conservative funds in blue and moderate in green. Rather than blindly allocate the same percentage to all funds, color coding allows employees to actually create a portfolio based on their risk tolerance without forcing them to fill out a risk tolerance form.
For the HR manager personally, the color coding method makes it much easier for her as she is more visual, just like most of her employees.
There’s a lot of work being done on investment menu choice architecture. The 90% of investors that want to delegate investment decisions are directed to the plan’s default option with target date funds as the most popular. Best practices dictate an all-or-nothing approach.
For the 9% that want to dabble, a selection of 7-9 funds is recommended so as not to overwhelm them – color coding would help these investors. And for the 1% that want to do it themselves, brokerage windows are recommended.
So ask your record keeper or advisor if color coding investments makes sense for your retirement plan. Investing is hard and most people don’t have the time or inclination to learn. Speaking their language by making investment decisions more visual is a good, practical and easy first step and may lead to better outcomes as well as greater fiduciary protection overall for the company.
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