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Financial Planning > Behavioral Finance

Why 401(k) education has failed

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Jargon, jargon, jargon, everyone complains about jargon. But the root cause of problems in 401(k) investment education goes far deeper than mere jargon. Its source lay at the very feet of our broader educational institutions. Why should we expect our 401(k) education outlines to succeed when, for the most part, they’re patterned after the same failed model of secondary school education? 

If you extend the metaphor, it’s a lot easier to understand why financial professionals are so frustrated by the lack of action by both employees and plan sponsors following the typical education session. In both the 401(k) education context and the secondary school education context, the educators don’t speak the same language as the students. As a result, we have lesson plans developed that work well for educators teaching educators, but flop when translated to their intended audience. 

And when I say language, I’m not talking about jargon. I’m talking about how the educators and the students come with different frames of reference. What’s important to one isn’t important to the other. Picture a parent explaining to a child why it’s important to eat healthy. For the parent, the frame of reference is middle-aged health and how healthy eating often prevents the onset of debilitating diseases. A parent speaking to a child from this point of view will likely only illicit rolling eyes, yawns, and a desire to mentally replay the most recent video game. On the other hand, if “eating healthy” means the child might run faster, jump higher and become the football player he wants to become, then maybe the parent can get the child’s attention. 

Most employees – and even some 401(k) plan sponsors – would rather be anywhere else than sitting in a 401(k) education seminar. Changing the content or even, for the most part, delivery, won’t accomplish what needs to be accomplished. Some think the use of humor represents the answer, but, more often than not, humor only makes the generally hour-long session more entertaining, not more educational.

Those looking for a real solution to this conundrum should search not within the entertainment world, but in the world of rhetoric, behavioral psychology and, in general, all matters pertaining to the art of persuasion and the science of decision-making. Truth be told, plenty of tools exist that have a proven track record of successfully convincing people to act in a preferred manner. That some of these techniques have been abused by nefarious governments tends to make them politically incorrect to discuss. 

But a frank discussion must be had. For every Darth Vader there is a Luke Skywalker. We need to understand the dark side of these tools in order to prevent their misuse. But we also have to embrace their good side, for that is what will lead us out of this 401(k) education netherworld.

I invite you to come discover how many are “Using Proven Psychological Techniques to Motivate Plan Sponsors & Participants to Implement Recommendations” – which happens to be the name of my presentation at the Center for Due Diligence 2014 conference in San Antonio, Texas, on Wednesday, Oct. 15, at 10:15 a.m. in Room Texas E. Can’t be there? Then stay tuned to these pages next week for a quick recap.


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