“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.