We all have different views of our post-career lifestyle—personal interests, beach house with an ocean view, an inbox that isn’t overflowing with urgent work projects—and saving for retirement is obviously important. But it also causes stress and confusion.
Much of it can be explained by behavioral finance. As time goes on, clients and prospects will look to advisors to improve both retirement plan engagement and outcomes. Offering solutions to combat behavioral finance challenges is critical to stand out in today’s competitive marketplace.
Limit choices to minimizing procrastination
Limiting the choice participants have to make is an effective strategy for dealing with behavioral finance challenges. A study involving, of all things, jam found that when grocery store patrons were presented with 24 different types and flavors, they purchased less than when only offered six. [1]
The point being less is more. The more investment choices through which a plan participant must wade, the less likely he or she is to make a decision. Helping plan sponsors to narrow down their offerings can be instrumental in increasing plan participation.
More and more, plan sponsors are seeing an increase in plan participation because of automatic enrollment. Instead of waiting for employees to opt in to plans, auto-enrolling participants into a qualified default investment alternative (QDIA) helps eliminate two behavioral finance challenges: procrastination and too many choices.
Plan participants can always opt out of a plan in which they were automatically enrolled at any time, but less work and fewer choices at the outset can often drive better participation overall.
Overcome inertia
While auto-enrollment as a plan design solution is a major step in combating the behavioral finance challenge, it doesn’t address all barriers. Participants are often auto-enrolled at a relatively low savings rate—3 percent being most common. And if an automatic savings increase is not implemented as part of the auto-enrollment plan design, many employees are simply stuck at a lower savings rate inadequate for reaching their retirement goals.
The reason? Most participants are predisposed to inertia: the tendency to remain unchanged. Proactively managing their savings rate and the discipline to increase on an annual basis—or after receiving a raise or bonus—is not something with which the average participant follows through.
As a plan advisor, you can help eliminate this additional behavioral finance obstacle of inertia by advocating for higher default savings rates and built-in automatic escalation features.
In addition, work with your clients to develop more strategic employer-matching formulas, for instance one that rewards participants for saving more initially, or increasing to a certain savings level within a specified time frame.
Provide plan participants with a personalized approach
Managed advice services also offer a solution to the inertia challenge. Managed services are approved and available as a QDIA within an auto-enrollment plan design solution. These services help customize a retirement plan based on a plan participant’s goals, retirement timelines and projected retirement income needs.
While most managed services only focus on the investment side, there are a few services that manage the individual’s savings rate over time. When evaluating these services as potential QDIA, you’ll want to understand if the service customizes a savings rate for the participant, and automatically builds in an annual increase personalized to the individual’s needs.
Also, evaluate whether the service allows participants to include supplemental information for them and their partner, such as outside retirement accounts associated with a previous employer, or an IRA. It helps to offer a more accurate and comprehensive approach to retirement planning.
By addressing these behavioral finance principles, advisors can help proactively address any retirement planning barriers that arise. With fewer barriers, plan sponsors can see higher enrollment, plan participants can be more retirement ready, and advisors can help everyone be more successful.
Ken Waineo is the senior director of retirement plan business development and sales operations at The Standard. The Standard is a nationwide retirement plan record-keeper with a dedicated presence in local communities. Committed to helping retirement plan advisors and their practices thrive, we offer you support, guidance and tools to make you stand out from your competition. Please contact us at 844.239.3561 for more information.
[1] The Jam Study Strikes Back: When Less Choice Does Mean More Sales, Digital Intelligence Today, January 19, 2015.
Ken Waineo is the senior director of business development and sales operations at The Standard. Ken has more than 15 years of experience working with 401(k), 403(b), and defined benefit and 457(b) plans. In his role, Ken helps cultivate, strengthen and broaden channel relationships, in addition to looking for ways to improve the sales process. Ken graduated from Wheaton College with a bachelor’s degree in psychology and philosophy and earned his master’s degree from Portland State University.
