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Fiduciary Rules and Practices

Unlocking Participant Behavior a Key to Retirement Security

There are many pieces to the puzzle that is retirement security. And one of them, suggests a benefits institute, is the behavior of plan participants. Working with, and influencing, that can help put pieces in place.

In the paper “Ten Ways Behavioral Finance Can Boost Retirement Security,” the International Foundation of Employee Benefits Plans (IFEBP) argues that behavioral finance, which it calls “a relatively new area of study,” shows “that retirement plan design and communication are too often based on assumptions about people that are wrong.” Further, it posits that the insights to which behavioral finance can lead can help employers, plan sponsors and plan administrators take actions that could make a big difference in what employees and plan participants do regarding saving for retirement.

The paper offers 10 suggestions for ways to use behavioral finance to help employees and participants in preparing financially for retirement.

  1. Stress what they can gain or lose. The IFEBP argues that the tendency to be loss-averse is “a chief tenet of behavioral finance” and that communicating in a way that helps individuals understand how they may gain by taking a particular action or lose by failing to will be helpful.
  2. Point out actions others are taking that are helping. This suggestion is premised on the notion that social norms — what is considered acceptable or expected — can influence behavior. In this case, the paper suggests alerting employees and participants to positive steps others are taking to enhance their preparedness for retirement.
  3. Use testimonials and stories. The IFEBP argues that testimonials concerning a particular person’s circumstances can evoke emotions that will spur a positive action.
  4. Encourage envisioning retirement. Encouraging employees and participants to imagine their retirement will help the natural tendency to focus more strongly on short-term interests and concerns, the IFEBP argues.
  5. Employ competition. Competition with oneself and with others can motivate positive actions, the paper argues. For instance, it suggests having groups of employees compete to see which can save the largest portion of income on average, or offer prizes for attaining certain saving levels.
  6. Use auto features. The paper observes that auto-enrollment and auto-escalation help overcome inertia and procrastination.
  7. Limit the number of investment options. Limiting the universe of choices from which employees and participants can make selections can make it easier for them to make decisions, the IFEBP argues. “The unintended consequence of a large number of choices is choice avoidance—another way to describe participant inertia and procrastination,’ it says.
  8. Consider how choices are structured. How the options from which employees may choose is structured matters, the paper argues. Participants may choose the first option if the list is long, it suggests, or the last ones they see since those will be clearest in their minds. “An optimal investment menu might have at the top a “basket of funds” like a balanced or target-date fund that is appropriate for a majority of workers.
  9. Use the employer match. The paper suggests that an employer can exert great influence by how it uses the employer match, and that it can be very helpful in getting employees to set aside amounts sufficient for a financially secure retirement.
  10. Provide access to help. Since individuals often lack knowledge and the time to assess their long-term needs, the paper suggests that providing access to professionals who can assist employees and participants may help them.