“401(k) auto-enrollment is the single most powerful thing we have to increase participation,” said Steve Wendel, before adding, “it’s record as a tool for increasing [retirement] readiness is more mixed.”
Wendel, principal scientist for HelloWallet, a financial wellness company that Morningstar acquired last year, was speaking from the latter’s annual investment conference in Chicago on Thursday morning.
“The default rate for 56 percent of companies that offer 401(k)s is still 3 percent,” he continued. “That 3 percent simply came from the Department of Labor a few years ago. Employees see it as an implicit endorsement, even though it isn’t high enough.”
It was just one of many reasons Wendel decided to write his book, Improving Employee Benefits, which he said “was born of frustration.”
“We were talking with a lot of companies, and we heard again and again, ‘Why aren’t our employees doing X?’ Now X might be exercise, or retirement savings or eating right.”
He noted that there are detailed studies that find employees want these kinds of things and ask for these kinds of things, and it’s not the employer that’s forcing them to do it, but then the employees fail to take action.
So why is there a gap between intention and action?
“By and large it is not a lack of desire; rather, it is small details over which human resources staff have control and don’t realize how powerful these details can be,” he argued. “It’s not a problem of low incentives, or procrastination or low self-control and there is a whole body of literature about how best to spur someone to action.”
For instance, he said a simple reminder does wonders for adoption rates; we get busy throughout the day and forget. A recent study found that sending a text increased adoption rates by 12 percent.
The time of day in which the email is sent also makes an enormous impact on adoption rates, where there is a 50 percent swing in behavior over just a few hours.
“It’s scary that we are that sensitive to our environment and that easily distracted, but we are,” he noted. “It’s all related to gut reactions, which are known as our ‘System One’ responses.”
He pointed to a recent ING study were the company changed the design slightly on a sign-up page—just simple tweaks to make it look a bit more professional.
“They realized a 27% increase in adoption,” he exasperatedly stated.
So it’s really about our inherent biases and emotion? Not investor education or anything else?
Sadly, yes.
“There are 168 papers on financial education that were analyzed by Fernandes, Lynch, and Netermeyer. They found there was no difference—meaning either zero or even negligible—when it came to the correlation between investor education and adoption. The people that attend investor education seminars are the type that will do well anyway. What really matters is the ‘just-in-time decision making.”
So what’s to be done to improve employee benefits, and importantly, to get them to participate?
“Just ask them. Make it easy. Let’s keep the ‘automatic,’ but get rid of the ‘default,’ or at least increase it.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
