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What’s Ahead for Behaviorial Finance in 401k Plans

behavioral financeIn a recently released video, Warren Cormier, President of Boston Research Technologies reviews what’s next for behavioral finance or befi. Retirement plan advisors have been adopting befi for their corporate clients more than any sector because resulting in dramatic benefits like the Ideal Plan using auto features. But can befi increase participant engagement?

Befi is not an executable program – it’s a lens through which we can better understand the world so real changes in behavior can be accomplished. Academic research shows that financial literacy education has a 0.1% effect on behavior whereas 90% of automictically enrolled participants in defined contribution (DC) plans do not opt out. Befi in DC plans relies on inertia and the power of making good decisions now for future behavior like eating better by buying healthy food, exercising by hiring a trainer and saving more in the future.

But DC participants will need to get engaged in planning for retirement at some point especially as they get older which is where Cormier suggests that enhanced active choice can be effective. Rather than ask whether someone wants to join their 401k plan, Cormier suggests that we expand that choice to ask whether people would like to enjoy a success retirement or risk doing it on their own.

Some experts suggest we go further and use pictures or graphics showing, for example, the type of trips people might be able to take if we save now for retirement compared to what we might face if we do not. Professor Daniel Goldstein has developed a tool which takes our present picture and ages it after which research shows that people dramatically increasing savings rates. Saving for retirement is like saving for a stranger but when we see ourselves as that stranger, it enhances our ability to make better choices.

Many plan advisors are pushing clients to adopt befi methods along with education methods like just in time training as well as programs customized by participant demographics. For plan sponsors looking to improve outcomes, befi is a powerful tool that may have more impact than switching out one small cap fund for another.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein
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