Whether it’s deciding when to start saving for retirement, what investment option is best or how much to contribute, there are many behavioral finance barriers at play when plan participants make decisions about retirement. These tendencies have been examined at great length to help predict how common behavioral finance biases can deter participants from making retirement planning decisions in their best interest.

Fortunately, key findings have proven that specific tips advisors provide upfront can help combat plan participants’ typical behavioral tendencies and make retirement planning seem simpler and more attainable.

Here are a few common plan participant behavioral predispositions and ways you can help them overcome these retirement planning barriers.

“I Have Plenty Of Time”: Help Visualize The Future Self

The first behavioral hurdle many plan participants struggle with is understanding the urgency of retirement planning. This tendency is frequently seen among younger generations. For the recent grads who are starting their first job out of college, saving for retirement can seem far away. Young professionals think they have the rest of their lives to save, so what’s the big deal if they wait a few years before contributing?

To help combat this mindset, try helping plan participants envision their future self. Ask questions such as:

Whether plan participants have considered these questions before or not, asking goal-oriented questions can get participants thinking about the lifestyle they see during their retired years. Once plan participants start thinking 30 years down the road, it will be much easier to dispel other behavioral biases about retirement planning. And, while some plan participants may not know the answers right away, it can help get the wheels turning about how to set their retirement savings goals.

“Long-Term Planning Is Overwhelming”: Break Down Monthly Income

Another way you can help participants plan for their future self is by breaking down retirement savings into a projected monthly income. Trying to figure out the total amount or “nest egg” a plan participant may need to support himself or herself during their retirement years can be overwhelming. However, providing a monthly income needs estimate can make retirement planning seem more realistic and attainable.

Not to mention, this method can also be helpful to show a participant’s current savings gap and drive home the point that he or she needs to begin saving early on in their career to support the lifestyle they want in retirement.

“Which Option Should I Choose?” Make It Simple

Now that plan participants understand the importance of planning for their future self and the value in starting retirement planning sooner rather than later, it’s time to make a decision about which investment options best fit their needs. This is when the behavioral finance concept of less is more comes into play. The iconic Jam Study demonstrates this behavioral finance logic well. In this study, when grocery store patrons were presented with 24 different types of jams at a supermarket display, shoppers purchased less than when there were only six jams being offered.

The less choices you offer participants, the better. The more investment choices a plan participant has to wade through, the more likely he or she will procrastinate on making a decision—or possibly choose to not make a decision at all. By keeping your retirement plan solutions simple and straightforward, the more likely plan participants will engage, take action and be on their way to saving for retirement.

“I Don’t Have The Time”: Recommend Auto-Enrollment

Even with the best of intentions, plan participants can often be their own worst enemies and not actually follow through on their intentions. This is especially true when it comes to retirement. To help ensure plan participants actually enroll in a plan that’s available to them, many plan sponsors have started auto-enrolling employees into their defined contribution plan, using a Qualified Default Investment Alternative (QDIA) as the default investment option. Auto-enrollment helps eliminate two behavioral finance challenges: time commitment and choice overload. Plan participants can opt out of a plan they are automatically enrolled in at any time, but less work and fewer choices for the participant can drive better participation long term.

 “I’m Already Contributing”: Explain Auto-Escalation

While auto-enrollment is key to overcoming the behavioral tendency to procrastinate setting up a retirement savings account, it does not guarantee retirement readiness. The next step to help a plan participant accomplish his or her retirement goals is to encourage plan sponsors to incorporate auto-escalation as part of their overall plan design. In order for many plan participants to reach their retirement savings goals, they need to contribute 10 percent or more. However, for a plan participant who is paying off student loans, saving for a down payment on a house or just trying to pay all the bills, contributing 10 percent may seem too high.

Auto-escalation can be a painless way for participants to incrementally increase the amount they save over time, without the contribution rate increase seeming too dramatic or threatening. You could even recommend that plan sponsors time this increase to coincide with when a pay increase shows up in a participant’s paycheck to minimize the impact. Coupling a reasonable default contribution rate—such as 5 or 6 percent—with an auto-escalation plan of, say, 1 percent each year, can help set participants up for better retirement savings success.

“I Don’t Want To Make The Wrong Choice”: Highlight Managed Services

Some plan participants prefer a hands-on approach to their retirement planning and are comfortable making their own savings rate and investment decisions. However, for other participants who want a more hands-off “do it for me” approach, a managed service may be a better fit.  

Managed services are typically made available as part of a plan’s overall investment option choices. They are also approved and available as a QDIA within an automatic enrollment plan design solution. These services help customize a retirement plan based on a plan participant’s goals, investment risk tolerance, retirement timeline and projected retirement income needs. Knowing that their retirement plan is being managed by professionals with the appropriate experience and expertise can instill more confidence and provide reassurance to plan participants.

Every plan participant will process information and make decisions differently, but recognizing and preparing for these behavioral finance tendencies can help participants overcome retirement planning barriers before it’s too late.

Ken Waineo is the senior director of retirement plan business development and sales operations at The Standard. Waineo has over 18 years of experience working with 401(k), 403(b), and defined benefit and 457(b) plans.

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