5 “Bad” Participant Behaviors, and How to Manage Them. There are 5 key financial behaviors of retirement plan participants that drive their investment decisions and determine whether or not they will act:
- Inertia: A predisposition to maintain the status quo and perpetuate certain money habits
- Procrastination: Putting off until tomorrow what they should be doing today
- Choice overload: Also known as “analysis paralysis” — too many choices overwhelm participants and prevent them from making a decision
- Endorsement: When employees allow themselves to be influenced by an “expert” recommendation (i.e., the plan design) rather than listening to their own reasoning
- Framing: Employees’ reaction to a concept’s presentation and its impact on their decisions
Employee Benefit Advisor magazine recently listed these 5 indicative behaviors of plan participants and offered some ideas for sponsors to optimize their plans to overcome them. To the extent that participants fall prey to these behaviors, they obviously impact retirement outcomes. As a plan sponsor, you may want to try to force changes in these behaviors, but it isn’t that simple. Like any behavior, financial predispositions are difficult to change, and as research has shown, it’s actually better to be like water and flow with the behavior rather than try to fight against it.
So instead of changing these behaviors, how can plans sponsors work with them? Plan design features such as auto enrollment and automatic contribution escalation have been notably successful in helping to combat employee inertia around participation and savings rates. If your plan still doesn’t offer these, automatic features are a solid way to help manage these behaviors and improve outcomes.
Offering a managed account solution as the plan’s qualified default investment alternative (QDIA) is another way to help participants be more successful in reaching their retirement goals. By defaulting participants into a defined goal of replacing 70% of their income in retirement, for example, you can essentially “do the work for them,” hence, increasing the likelihood that they’ll embrace the default option and as a result, again, improve their outcomes at retirement.
On the fiduciary front, EBA had this to say about the correlation between plan design and successful outcomes: “A plan sponsor will always be a fiduciary to the plan. That said, to help design and implement plans that will have the greatest probability of participant success, sponsors should look to hire a trusted fiduciary. One of the best ways to promote better behavior among participants is by acting as a trusted partner.” In addition, protect your participants, and make sure that every plan-related decision you make is in their best interests.
The bottom line: Successful outcomes start with plan features that work with, not against, participants’ otherwise negative behavior patterns. By optimizing your plan to support participants, along with hiring a fiduciary partner, you can help more of your employees achieve their retirement goals.
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