What motivates people to become aggressive savers? Or, perhaps the better question is what drives people to act contrary to their own best interests? The emerging field of behavioral finance argues that emotions often trump reason when it comes to personal investing decisions—an important point to consider for plan sponsors seeking to build-up 401(k) participation levels.
The emotions that can come into play include mistrust or skepticism about plan benefits. Feeling overwhelmed not knowing where to start or how to invest, or believing it’s too late to save for retirement. Or in other cases, it’s a matter of preferring the instant gratification of today’s needs versus saving for an unknowable future.
The following suggestions, in the hands of advisors working with engaged plan sponsors, can begin to tackle some of these concerns and doubts, while creating a groundswell of participation from the grassroots up.
1). Tailor the Message
The chief means of combatting the fears and misperceptions about 401(k) plans, and investing in general, are regular group informational meetings. The importance of educating employees about the benefits of full participation in their company 401(k) plan can’t be overstated. The vital caveat is to avoid canned presentations that don’t reflect the demographics and education level of the employee base.
Senior-level managers may have very high expectations if you take them away from their job responsibilities for an hour or more. Others may need a much more rudimentary overview of investing fundamentals before you can even begin to delve into plan specifics and investment choices.
There’s a delicate balance in preparing large group presentations. But the crucial mistake to avoid is confusing a lack of knowledge with a lack of intelligence. If you talk down to your audience, you’ll alienate them. Conversely, if you overuse industry jargon, you’ll risk losing their focus.
On a practical level, keep in mind the workflow patterns of the organization when scheduling presentations. Some businesses have inherently busy times that should be avoided. Or for high-stress, intense-concentration work, there may be break times that should not be interfered with.
2). Talk Less. Listen More.
If you want to surprise and impress employees, stop talking and start listening during one-on-one planning session. We’ve all gotten so used to generic solutions and self-service options that a skilled investment professional willing to customize a recommendation to an employee’s specific financial concerns and goals will surely be met with enthusiasm.
If the goal of the group sessions is to pique interest, the one-on-one sessions is where it’s time for the employee to commit. A useful resource for preparing both group investment education meetings and one-on-one planning sessions is the Department of Labor Interpretive Bulletin 98-1 titled Participant Investment Education.
3). Be Relevant and Specific
One of the most valuable tools that will help facilitate the discussion with each employee is a personalized gap analysis statement. It’s a snapshot worth a thousand words. The report should delineate for employees how much they need to save for retirement based on their specific needs versus how much they’re saving currently.
The key points to illustrate are the exponential benefits of even small increases in 401(k) contributions, the power of compound interest over time, the tax savings that can be realized and the importance of not leaving any employer match on the table.
Another vital part of this conversation is a discussion of the optimal asset allocation and investment choices based on the employee’s specific needs. When the advisor can illustrate savings growth based on realistic rate of return assumptions, financial goals begin to seem achievable.
4). Coax The Inner Entrepreneur
Setting out bold goals and fastidiously pursuing them is the heart of what it means to be an entrepreneur. This same spirit can be employed when it comes to planning for retirement.
Advisors should encourage employees to imagine all the things they have dreamed of doing when they are no longer working. Whether travel, relocating, or starting a second career that reflects their true passions, they should write down and regularly fine-tune their goals.
Once these hopes for the future have been articulated, advisors can carve out a plan designed to save enough for future aspirations while also affording for fixed living expenses. Employees will be motivated to fill the gap once they have a vision of what the future could hold.
5). Counteract Inertia
Automatic 401(k) plan features are a proven antidote to combat employee inertia. To truly move the dial on employee saving and investing behavior, take the guesswork out of it.
Enroll all employees in the plan as soon as they are eligible, with written notification and ample chance to opt out. To offer the maximum benefit, employees should be enrolled at a level that takes full advantage of employer matching.
Also, automatically enrolled employees should be invested in the company QDIA. A well-diversified portfolio of equity and fixed income investments focused on long-term appreciation and capital preservation will be prudent for virtually everyone.
Automatic escalation is probably the most impactful feature. Even with the best of intentions, employees often neglect to increase their deferral after their plan begins. Since the general rule of thumb is to set aside 10 percent of earnings toward retirement, that’s a good target via 1 percent annual increases. For most employees, the relatively small paycheck reductions will seem insignificant, while the growing retirement assets will be gratefully accepted.
Automatic re-enrollment protects employees from poor investment decisions. Once a year, during open enrollment, participants should be shifted into the QDIA if they don’t opt out. Studies have shown that about 70 to 80 percent will allow their money to be moved once they understand the rationale.
To alleviate any concerns plan sponsors might have about using these automatic features, advisors should point out the fiduciary protection provided by the PPA of 2006 as long as employees are properly notified and given the chance to opt out.
Long-Term Commitment
401(k) plans are only as good as the employee acceptance and participation they engender. While employees certainly can’t be compelled to participate, once they understand the benefits, most will.
No doubt, misperceptions and skepticism about investing are obstacles that must be overcome. But they can be addressed through a program of regular, robust employee communication. And then automatic features such as deferral escalation and QDIAs will be accepted and even welcomed.
The commitment for advisors and plan sponsor to customize plans and then continue to revisit individual goals, targets and asset allocations as employees come closer to retirement, is a significant undertaking. But it’s the most effective way to get employees engaged, keep them motivated to save more on an incremental basis, and continue to save and invest for the future.
Matt Gallagher is head of business development at Beirne Wealth Consulting, an SEC Registered Investment Advisor with $1.9 billion in assets under management. Gallagher’s firm offers a service for advisors to outsource their retirement plans and institutional business if they do not want to do it themselves. He is also a co-author of the book “The Rest Easy Retirement Plan.”
Gallagher is responsible for identifying business opportunities, communicating the firm’s unique capabilities and solutions to prospective clients, and cultivating those relationships on an ongoing basis. He finds it especially rewarding when he is able to assist institutional clients in delivering the optimum retirement plan to their employees. Check out BeirneWealth.com for more information.