Behavioral finance strategies improve the odds
Applying a few innovative moves in your 401(k) plan could result in increased retirement savings for your employees. That’s because, when it comes to money, subconscious perceptions can torpedo a plan participant’s success.
Applying behavioral finance principles may help employees overcome obstacles that often keep them from making rational financial decisions. Here are a few financial behaviors that could be sabotaging employee retirement savings, along with ideas from the International Foundation of Employee Benefit Plans (IFEBP) that may serve to counter them.
People tend to dislike loss more than they like gains. As an employer, you can capitalize on this tendency with the language you use to communicate about the plan. For example, “Would you rather pay yourself or the government?” or “ Increase your retirement savings and cut your taxes,” is much more effective than “Stop missing out on your retirement plan match.” Although both communicate the same message, says the IFEBP, the former packs a more powerful punch.
We all like to be included, and that means we look to others to figure out our next move. As you communicate about your 401(k) plan, take advantage of this tendency by discussing what others are doing with regard to saving. For example, say something like, “80% of ABC employees contributed to their retirement plan last year.” Or get even more specific about the
group you’re targeting with this message: “Nine out of every ten new hires say “yes” to saving 15% of their pay for retirement.” The IFEBP says that breaking down the message to specific groups — such as new hires, people over age 50, or those working at a specific location — can be most effective.
Faced with a long list of choices, most people hone in on entries at the top. Unless the list is particularly long, they may recall only the last few items. When providing a list, consider the order in which you include entries. For example, if you present a list of investment funds available in the plan, the tendency may be to list the choices from least risky to most risky. As a result, you may find the majority of participants select very conservative investments or, if the list is long, very aggressive ones because they only remember the last few funds on the list. Instead, consider reserving the top of the list for investments that are likely to be appropriate for most participants, such as target date or balanced funds.
There are many more principles of behavioral finance that may help in your 401(k) plan communication efforts. Click here to view ten ways behavioral finance
can boost retirement security.