Trendspotting
DNA Investing
Study says investment behavior is genetic
Investor behavior is largely determined by nature rather than nurture, according to a recent study, “Nature or Nurture: What Determines Investor Behavior?” by finance professors at Claremont McKenna College and the University of Washington.
By studying twins and their financial behavior, researchers found that genetics account for one-third, on average, and as much as 45% of investor behavior, according to a release of the study results. When combined, other factors previously studied, such as age, gender, education, wealth, and home ownership, explain only 5% to 10% of investor behavior, according to the research.
“We found that genetics explains differences in investor behavior much more than everything else that people have proposed,” said Stephan Siegel, assistant professor of finance at the University of Washington’s Foster School of Business.
The researchers cross-referenced nearly 38,000 twins in the Swedish Twin Registry with comprehensive personal financial data—stocks, bonds, real estate, cash—collected by the Swedish government. To separate genetics from environmental drivers of financial behavior, the researchers compared each twin pair’s stock market participation, asset allocation, and portfolio risk.
In all three measures, the data showed a significantly higher correlation between identical twins than non-identical twins. Correlation of a random sample of the population is close to zero. The researchers said this stark difference between the identical and non-identical twins relative to the general population is strong evidence that investing behavior is, in significant part, hereditary.
In addition, the researchers considered 716 twins from the Swedish registry who were raised apart and found their average correlation in investing behavior to be virtually identical to those raised together, adding more evidence that genetics drives investor behavior. —Rebecca Moore
Bill would require disclosure of participants’ expected retirement income
A new bill aims to inform participants of how their account balances translate into actual income in retirement.
U.S. Senators Jeff Bingaman (D-New Mexico), Johnny Isakson (R-Georgia), and Herb Kohl (D-Wisconsin) have introduced legislation that would require defined contribution plan sponsors to inform plan participants of the projected monthly income they could expect at retirement based on their current account balance.
Specifically, under the Lifetime Income Disclosure Act, defined contribution plans subject to the Employee Retirement Income Security Act (ERISA) would be required to inform participants annually of how the account balance would translate into guaranteed monthly payments based on age at retirement and other factors. To ensure there is no material burden or potential liability on employers who voluntarily sponsor 401(k) plans, the legislation directs the Department of Labor (DoL) to issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure.
Employers and service providers using the model disclosure and following the prescribed assumptions and DoL rules would be insulated from liability.
According to an announcement, the measure is patterned on the Social Security Administration’s statements, which are mailed annually to working Americans to inform them of estimated monthly benefits based on their current earnings. “By providing similar information for 401(k) plans, the Lifetime Income Disclosure Act would give American workers a more complete snapshot of their projected income in retirement,” the announcement said.—Rebecca MooreMore Articles
“Many Target-Date Investors Also Invest in Other Funds:” Retirement plan participants invested in target-date funds along with other funds offered by the plan could end up with a potentially inferior portfolio in terms of risk/return tradeoff, according to a study by the Employee Benefit Research Institute (EBRI).
“EBSA Examines Fiduciary Status, Investment Advice:” Assistant Secretary of Labor Phyllis C. Borzi suggested today that the rules governing fiduciary status might allow too much leeway for advisers to retirement plans.
“More Retiree Households in Retirement Income ‘Drawdown:’” Almost half of all financial assets held by households age 65 and older can now be considered in retirement income “drawdown” mode, according to a new research report.
“Schwab Finds Half of Advisers Would Consider Independence:” When Charles Schwab asked advisers outside the registered investment adviser (RIA) channel whether they’d consider going independent, almost half said yes.
“DoL Set to Issue Annuity Project RFI:” In implementing its newly announced initiative to see how it can best facilitate the use of lifetime income investment vehicles in retirement plans, the U.S. Department of Labor (DoL) plans to release a formal request for information document in January.
“Court Rules Wal-Mart 401(k) Suit Requires Further Discussion:” The 8th U.S. Circuit Court of Appeals has vacated a district court’s dismissal of a suit alleging Wal-Mart Stores, Inc. breached its fiduciary duties to 401(k) participants by selecting investment options that charged excessive fees.
“Almost 1 in 5 Americans Plan to Save More:” The recession has been a wakeup call for some Americans, as 18% of those surveyed plan to save and invest more in the future, according to a new COUNTRY Financial survey.