WASHINGTON-While fund companies do a good job of focusing on investor needs and expectations, to best help clients prepare for retirement, they need to first understand investor behavior, according to panelists at the Investment Company's Institute's 49th Annual General Membership Meeting here this month.

The way people decide how much money to save for retirement is random, panelists agreed. There are all sorts of shortcuts that people take and arbitrary ways they decide on a number.

"It's too complicated to figure out an exact number that has to be saved for retirement," said Shlomo Benartzi, a professor at the University of California Los Angeles.

Although people should reevaluate their retirement savings plan after they open one, they rarely do. The premise used to be that individuals planned their investing in stages. When a major life event occurred, such as turning 30 or having a child, people would reassess their savings, but that is not the case, noted Beth Segers, a managing director with Putnam Investments of Boston.

Financial prudence is based more on how money was handled in people's homes growing up, Segers said. If a family handled their finances well and taught their children to save, then as adults, they are more likely to do the same.

Working with a financial adviser can be beneficial for investors in helping to prepare for retirement. Finding the right one is crucial, as advisers typically have their own behavioral biases, Benartzi said. If an adviser loves risk, then they assume their clients love risk also, he commented.

A third of the people who have a 401(k) plan do not use an adviser, Segers commented.

"The level of financial literacy is pathetically low" in the country, Benartzi quipped. He related a study that showed that when asked what a money market fund was, only 12% of men and 6% of women could describe it.

"Nobody knows anything, and we need to help people; it's very important," he said.

An adviser plays an important role in investment expertise and understanding investors' behavior, said John Ameriks, senior investment analyst at Vanguard Group of Malvern, Pa. For example, people are increasingly taking care of their parents or having a child move back home after college. People will interrupt their own retirement savings to take care of family members, Segers said. An adviser is able to make people realize that saving for retirement is a priority, panelists agreed.

Investment fees are also an issue. Participants do not understand fees on their own and need to be offered products with reasonable fees, Benartzi said.

Although fees aren't typically discussed right away, investors need to assess and recognize the value they receive when working with an adviser, against the fees they might pay, Segers said. If fees are the only thing a client wants to talk about, then they probably are not a good client, she said.

Fund companies may also be offering too many choices, which can be counterproductive for business, Benartzi observed. Investors get confused when they have so many options. "People love choice, but it reduces motivation and satisfaction," he said.

He gave the example of research conducted in 2001 by Sheena S. Iyengar, an assistant professor at Columbia Business School, and Mark R. Lepper, chairman of Stanford University's psychology department, that involved a supermarket offering different jam tastings.

When consumers were offered six choices or less, they tasted the jams and usually ended up buying one. When people were offered a selection of six jams or more, they couldn't decide what to buy, and ultimately didn't purchase anything, he said.

Fund companies should examine simplifying their offerings. Target-date funds are one way to do that, panelists noted. They're easy for investors to select because they just pick their retirement date and go into that fund, Benartzi said. Instead of investors having to figure out if their risk tolerance is conservative, moderate or aggressive, they can default to the target-date fund. It is a way to take the risk off the investor, by not offering too much choice, Benartzi said.

The Pension Protection Act is a great way the government is fighting inertia to help people save for retirement, with automatic savings and enrollment. However, there is a large deficiency in helping investors prepare for the distribution phase of retirement, Benartzi noted.

"We're helping people do the right thing by saving for retirement, and we're telling them not to worry," he said.

As older individuals retire, they need to have a plan on how to make their money last for the rest of their lives. Decisions such as these may be harder because as people age, their cognitive ability is lowered, Benartzi said.

He gave the example of research conducted that asked the simple question which of the following numbers represents the biggest risk of getting a disease. The choices were one in 100, one in 1,000 and one in 10. Obviously the answer is one in 10, but only 71% of older adults aged 65-94 answered correctly, while 96% of undergraduate students answered correctly.

"We're letting people learn to swim when they are least equipped to do so," he said.

Benartzi also warned against the implications of longevity. One out of every 10 people over the age of 65 will live to be 99 years old, he said. There is a big difference between planning for a few years of retirement and planning to have enough money to last you 34 years, he said.

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