Even when employers automatically enroll their employees in their retirement plan, workers’ own behaviors can limit their success, Dr. Greg Kasten, founder of Unified Trust, told AdvisorOne on Monday.
Kasten has identified five participant behaviors that plan sponsors have to accept to give participants the biggest chance for success.
First, and most important, is inertia. Whatever path participants are on, they are likely to stay on, Kasten said. The second behavior is closely linked with inertia and just as important: procrastination.
The third behavior is the endorsement effect. To illustrate, Kasten said that when sponsors auto-enroll participants into a plan at a 3 percent deferral rate, it implies to participants that 3 percent is adequate. “Sponsors have implicitly endorsed the 3 percent rate as good enough,” Kasten said.
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The fourth behavior is anchoring, which is when participants hold onto the same investing biases they had when they started investing. “Where you start is where you stay,” Kasten said.
Finally, hyperbolic discounting is when participants heavily discount the future. “For example, say I’m going to give you an apple today or two apples next month. Most people would take the apple today even though they could get twice as much in just 30 days.”
Sponsors can take over for participants to overcome the first two behaviors, but it’s not enough just to enroll them, Kasten said. “Most people don’t even know why they’re in the plan. Retirement is the biggest purchase participants will make, and most haven’t thought about how much retirement will cost and how they’re going to pay for it.”
To overcome these behaviors, sponsors need to focus on the structure of their plans rather than the investments, Kasten said.