Regrets

Speaking of the '60s, John Lennon once said, "Reality leaves a lot to the imagination." If you listen to the lyrics from Imagine you would understand what he meant. "It's easy if you try..." to imagine a world that could have been. After reading Jason Zweig's book, Your Money and Your Brain, I realized that Lennon came up with a pretty good description of the neuroscience of regret. Zweig writes that we have regrets because, "The human brain is a brilliant machine for comparing the reality of what is against the imagination of what might have been." Zweig continues by saying it is this "...woulda shoulda coulda... ache of regret [that] encourages you to play out in your mind what else could have happened and focuses your attention on what you should have done instead. And that, in turn, motivates you to do better in the future. Regretting our mistakes keep us from rushing to commit them again."

A paper, What We Regret Most ... and Why -- by Neal Roese and Amy Summerville, confirms
"...that regret often initiates corrective action, but clearly, individuals are more likely to undertake corrective action when they believe it to be both possible and effective." It is also helpful if we can learn from little mistakes and avoid the big ones. As parents we know instinctively what child author Teresa R. Funke wrote, "The only difference between a grown-up's mistake and a child's is the size of the consequence."

As an advisor, I talk with lots of people who regret their lack of retirement savings. The longer it takes to realize this mistake and take corrective actions, the greater the consequence will be. That's why 401(k) participants need to be constantly reminded how much they should be contributing and into which options. And that's also why I am so excited about the new target date income funds (TDiFs) I learned about from W. Scott Simon's Morningstar column. Scott is a good friend and probably the leading advocate for the protection of retirement plan participants from overpriced and inappropriate plans

In his column, Scott highlights the term "Income" in the Employee Retirement Income Security Act (ERISA). "This reminds us that ERISA is concerned with the security of plan participants' retirement income ... While that has always been true ... in the past the focus has generally been on accumulation of the largest lump sum possible..." The problem with this approach is twofold - you're never sure if you are saving the right amount and you're subject to a collection of unknowable risks, such as inflation, market volatility, interest rate changes, and individual longevity. While Scott's article focuses on how TDiFs handle these risks better than traditional target date funds or annuities, I am more excited about the feedback they provide. Plan participants are regularly informed whether their plan is underfunded and what corrective actions could be taken, like increasing contributions or delaying retirement. This is exactly the type of motivation that is necessary to turn small regrets into effective corrective actions.

"If you don't know where you are going, you might wind up someplace else." That Yogi Berra saying summarizes the problem with traditional 401(k) plans. However, with the new targeted income plans, not only are the relevant risks managed, but also, income goals are established and meaningful feedback is provided. So at retirement, like Sinatra, your regrets will be "... too few to mention."