At CFDD 2011, Use ‘Positive Manipulation’ to Influence Client Behavior

Automatic enrollment, Advaney argued, may solve low participation rates, but wondered if it actually improves outcomes for participants. “It’s a plan solution, not an individual solution,” she said. Investors are still saving too little and, often, the participants with the greatest need are the ones who opt out. (Cafaro noted that divorced participants, on the advice of their attorneys, are frequently part of the 4% who do opt out of retirement plans.)

To optimize automatic enrollment, Advaney said, plans should adopt the highest deferral rate possible combined with automatic escalation to move participants to a higher rate as they get older. This strategy should be adopted for existing participants as well as new ones, she said.

Simplifying participants’ options is also beneficial. Offering just a few carefully chosen options instead of a full menu of choices is a more effective strategy to engage participants; in fact, engagement levels off at around 10 to 20 options. Advaney suggested creating a mental picture of what participants’ contributions are doing. Charitable organizations have utilized this strategy to great advantage, she said, by describing what dollar amounts provide in concrete terms. For example, a $50 dollar contribution might feed four families, Advaney suggested.

Advisors can help direct their clients’ decisions toward more positive outcomes by framing their questions differently, Cafaro said. When asked to choose between three risk allocations—conservative, moderate or aggressive—most investors chose to invest in moderate risk vehicles, Cafaro said. However, when their options were limited to simply conservative or aggressive, most investors chose to invest aggressively.

This evidence may lead some advisors to ask, “Why do we expect people to manage their own money at all?”

The best plan design is a hybrid between participant-directed investments and professionally managed plans, Farrow said.