Consider Behavioral Bias in Retirement Plan Design and Communications
As an investment professional, you may already know a great deal about how behavioral bias affects how investors make decisions and how they perceive their account performance. We know, of course, that behavioral finance tells us that many people are influenced by their emotions, their aversion to risk, their own social peer group, and sometimes by a skewed perception of control or investment skill.
When it comes to retirement plans, there are a few things we can do to improve outcomes while subtly addressing the natural biases many of us have. Let’s talk about two of them – namely, things we can address in plan design and things we can communicate to help set expectations.
In plan design, our first goal is participation. To that end, auto-enrollment has been proven to be effective in getting people to start along their savings path because most people don’t opt out. Add an auto-increase feature and we nudge participants from a starting rate to a more meaningful savings rate over a few years – hopefully as their incomes grow as well. Both auto-enrollment and auto-increase features take the emotional decision out of the equation and establish a savings habit. This is especially meaningful for younger savers as we know well that those first contributions have the most years to grow and compound.
When it comes to communications, perhaps the most obvious message is that saving for retirement is truly long-term investing. The opportunity to save on a pretax basis now or on a post-tax basis with a Roth account takes a long-term approach that looks past short-term news events that move markets. Messages about dollar cost averaging and diversification also underscore this idea of saving for the long-term. It’s an essential topic to cover as we try to help savers fully appreciate the rationale behind their periodic payroll contributions.
Your role as a trusted advisor is crucial to both your relationship with the plan and plan sponsor, but also to help employees navigate past their own biases.
Talk to us about expert plan design and plan communications that can help drive better outcomes.Download Companion Document