Not investing enough.
There are tremendous tax benefits to investing in a 401(k), but one has to save the money in order to realize them. And Americans are notoriously bad at saving—typically putting away half of what their counterparts in Europe and Japan manage. Workshops provide terrific information about general concepts and trends, but they aren't always enough. "Workers have to understand things in personal terms," says Christopher H. Cumming of Diversified Investment Advisors. And that's where financial modeling, detailed financial statements and computer software can help.
Using retirement funds unwisely.
Too many Americans view their 401(k) or IRA as little more than a savings account. They borrow against it—thus reducing the principle, capital gains and interest. Even worse, many simply don't roll over their savings when they change jobs. Not only do they have to ante up for taxes owed on the savings, they wind up starting all over again. "And now they have fewer years to save than before," says Price Waterhouse's Roger Hindeman.
Fear of loss.
"A reasonable fear of loss is entirely healthy," says James Sullivan, manager of individual services practice at Arthur Andersen Co. To be sure, markets are volatile, and individual stocks can drop into an abyss and never return. Yet, "The fear of loss among most participants is greatly disproportionate to the pleasure of gain. This may cause many participants to bypass what otherwise may be very sound, long-term investments." The solution? He suggests that HR emphasize returns over the longterm, and focus on real returns once inflation is factored in.
One of the most common mistakes fledgling investors make is selling shares of their equity mutual fund after one or two down quarters in the market. Likewise, many participants continually chase the previous quarter's best-performing mutual fund but don't obtain last quarter's stellar results. By emphasizing long-term results and showing hot funds that dropped in value the following quarter, investors will become more adept at investing for the long haul.
Fear of making the wrong decision.
Inundated with investment choices and information, some participants make just one decision—defaulting to the most conservative investment choice available. It's HR's task to point out that too conservative a choice can actually be riskier than an aggressive instrument, says Wayne Bogosian, national director of personal financial education at The Wyatt Company.
Investment strategies that don't relate to age, lifestyle or risk tolerance.
One of the difficulties of investing is that there are no set rules. It's partly a matter of age, where one is in life and how strong a stomach an individual has for volatility and risk. To be sure, some try to realize too high a return over a short period of time. Others watch an investment drop during a down market, sell and vow never to get burned again. Making good decisions requires a thorough understanding of investment concepts—something computer programs and written matter can help immensely with.
Chasing unrealistic expectations.
At the peak of a bull market, a general euphoria leads participants to believe the gains of the recent past will continue indefinitely. Thus, "many find themselves with unsuitably aggressive portfolios they should never have," says Sullivan. He recommends that HR stress the solid returns of a balanced fund over time, but also show how losses inflicted by selling an aggressive fund in a bear market can devastate an investor.
Personnel Journal, November 1994, Vol. 73, No. 11, p. 40.