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Clearly it’s time for a new approach. When it comes to encouraging plan participants to make the most of their employer-sponsored, voluntary retirement savings benefits, the retirement services industry has, by and large, fallen short. Over the last 30 years, we have tried motivating participants through investment education. Saying our success has been limited may be something of an overstatement.
Of late, the industry has focused significant attention on calculating the projected income that participants are currently on track to receive after retirement. While that may be a very meaningful exercise for employees who are in their fifties or older, it is arguably far less impactful to younger employees. These forecasts are so long-term, and their perception of retirement is so distant, that the concept of retirement readiness is simply not likely to be engaging for younger employees.
Starting at Start
If we are looking for a new and meaningful way to motivate participants into effectively utilizing their retirement savings benefit, we should take into consideration some of the insights that are being generated by the field of Behavioral Finance.
Within this arena, one of the most generally accepted principles is that the right behavior will most likely lead to the best outcome. If that is accurate, then we should focus our efforts on ensuring that participants are motivated to engage in the right behaviors. This line of reasoning is in stark contrast to relying on retirement income projections, which conversely begins by focusing on the desired outcome.
We know that most participants do not possess the knowledge or experience to identify the best retirement savings behaviors on their own. As a result, the key to their success may depend on determining how we can most effectively drive those behaviors that will lead to the best participant outcomes.
Aiming is Easy
As an industry, we have already decoded the DNA of successful retirement savings. First, and perhaps foremost, employees need to participate in the plan. Some deferrals are always better than no deferrals. Second, participants need to defer at least enough to take advantage of any employer match. Third, participants should set aside between 10% and 15% of their income over their working careers. Finally, participants ought to invest in a reasonable asset allocation or in a professionally managed diversified investment, such as a target-date fund[1].
If those are the behaviors that we want to foster, then the first step on the path to success would be to outline them to participants. We need to provide a cheat sheet that breaks those behaviors down to a level that the least sophisticated participant can understand. What’s more, we need to record the behaviors; we need to come up with an easy way to score the behaviors, and make those scores meaningful to the participant.
Motivating is Difficult
To keep it simple, we would consider assigning points for each appropriate behavior that a participant demonstrates. Additionally, certain behaviors that are detrimental to retirement saving would result in points being subtracted from a participant’s score—obvious examples are hardship withdrawals and participant loans.
Each quarterly statement could list the behaviors that are being measured and then provide each participant with his individual score, based specifically on that participant’s plan behavior. Because different plans have different features, the plan provider should work directly with each plan sponsor to determine an appropriate point system.
For the sake of illustration, consider the following points system:
- Participating in the plan – 1 point
- Deferring enough to get the entire match – 3 points
- Deferring up to 10% of salary – 2 points
- Deferring up to 15% of salary – 2 points
- Using an asset allocation model or professionally managed investment option – 2 points
- Taking a loan – -2 points
- Taking a hardship withdrawal – -3 points
In this example, ten would be the maximum points that a participant could achieve, but they would only receive that score by demonstrating all of the positive behaviors and none of the negative ones.
[1] The principal value of a target date fund is not guaranteed at any time.
There may also be a potential benefit in showing the average score of all participants in the same age cohort as the participant. That would add another element of “gamification” to the exercise and would potentially provide additional incentive to participants to raise their scores and therefore the likelihood of achieving their retirement savings goals.
Reward Good Gaming
Based on each participant’s behavior, a quick suggestion for enhancing his or her score, or a commendation for demonstrating all of the desired behaviors, could be added to the quarterly statement. In either case, this would be an easy and cost-effective way to reinforce the desired behaviors.
Obviously, the point values and behavioral sets would vary from plan to plan. This could further emphasize the specific behaviors that advisers and plan sponsors feel are most important in leading their participants to successful outcomes.
By first clearly outlining, and then scoring the behaviors that will lead to participant success in saving for retirement, we remove some of the guess work that can frustrate participants. Instead, we can provide clear and perhaps even fun guideposts for participants to follow in their quest to achieve retirement readiness.
Todd Perala, director of BMO Retirement Services
BMO Retirement Services is a part of BMO Global Asset Management and a division of the BMO Harris Bank N.A., offering products and services through various affiliates of BMO Financial Group.
BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management, retirement, and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions. Those products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO). Investment products are: Not FDIC Insured | No Bank Guarantee | May Lose Value
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.