How to Overcome Behavioral Biases, Raise Retirement Savings: Cerulli

Cerulli suggests ways recordkeepers can work with retirement plan participants’ behaviors to improve outcomes

Cerulli’s August edition of The Cerulli Edge addresses ways recordkeepers can better engage retirement plan participants to improve outcomes.

An overwhelming difficulty in getting workers to actively participate in their plan is the disconnect between current and future needs. Cerulli referred to a Prudential study that found investors are apathetic about saving for retirement because they see their future selves as a stranger.

“It is difficult for consumers to relate to the person they will be, and most find it much easier to neglect this image,” according to Cerulli. Furthermore, many investors won’t see the payoff of saving for decades, which leads them to opt for “small rewards” like a slightly larger paycheck over retiring earlier than if they had saved more.

One way recordkeepers can overcome those biases is by tailoring communications to participants’ life events and cutting back on retirement-specific communications. Instead of sending retirement information to all participants, recordkeepers should learn more about where each participant is in his or her life cycle and use that information to create “just-in-time education.”

For example, Cerulli noted information about the state of the health care industry goes over the heads of many 25-year-olds, but education about reducing student debt is invaluable.

Tying in retirement information with the bigger issues participants are facing day to day can help keep retirement in perspective, according to Cerulli. Furthermore, it’s what participants want. Participants of all ages said their most desired communication from their 401(k) provider was personalized life-cycle information.

Worse Off Than They Think
A false sense of security is another obstacle to participants saving for retirement. Many think they’re already on track and don’t need to save more. Cerulli surveyed 1,000 participants and found less than 13% admitted they were unsure of how much they were saving. That might seem like the majority is confident about their retirement saving, but Cerulli also asked about asset and salary levels and other profiling questions and found “a large group of individuals had no reason to be so confident in their retirement. Rather, based on age and foreseeable circumstances (inheritance for example), many were far behind in numerous metrics they had listed.”

Benchmarking can give participants a clear idea of where they are in saving for retirement, Cerulli suggested. Recordkeepers should compare participants’ asset balances to what they are expected to have saved at their age to provide the “wakeup call some need to get their deferral rates in gear.”

One potential drawback, though, is overwhelming participants with significant shortfalls. Recordkeepers should focus on positive reinforcement, Cerulli urged. “More success has been found reaching for little wins on a yearly basis, either by getting participants enrolled in the plan or increasing deferral percentages, and coupling these strategies with positive reinforcement that the participant is doing the right thing,” according to the report.

For participants who aren’t even sure how much they can save, budgeting assistance can be a value-added service that gets them on track. Employer matches are another incentive that gets workers saving, and are a relatively simple step, according to Cerulli.

When all else fails, the easiest way to combat apathy is automatic enrollment and escalation. Cerulli found almost two-thirds of participants view automatic escalation favorably and 40% admit it would help them save more.

Cerulli said that as Gen Y establishes itself in the work force, automatic programs will be the “No. 1 way to get this new cohort contributing to their plans.” The report cited research from Fidelity that found about half of Gen Y increases in contributions were due to automatic escalation.

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