Emotion and learned behavior too often play a big role in plan participants’ saving and investing decisions, according to “Rethinking Defined Contribution Communication and Education,” a paper from the Defined Contribution Institutional Investment Association (DCIIA).
These financial decisions are closely tied to their gut feelings about risk, expectations for the future, delayed gratification and the end of life. Participants switch from logical, fact-driven “left brain” thinking to more intuitive, subjective “right brain” thinking when making such decisions, says the Boston Research Group.
“When people function on the basis of how they feel, they can start to make bad decisions,” Warren Cormier, founder and president of Boston Research Group, tells PLANSPONSOR. He points out that as people age, the cognitive abilities of the left brain tend to diminish, and people can make decisions that are more based on right-brain thinking—a possible reason older people are more vulnerable to financial scams. (Cormier is a co-author of the paper.)
People often engage in following some personal rule of thumb, Cormier says, such as “You shouldn’t put all your eggs in one basket,” or not trusting the stock market. “They’re making up their own heuristics about how to invest,” he says.
They may sound sensible on the surface, but they are uninformed decisions. In fact, keeping assets in a target-date fund—a viable option—is way of keeping eggs in one basket. Education is a way to inform participants that these suppositions are not necessarily correct, Cormier says.
There is a flaw in the strategy of education, Cormier says, which could be described as “everyone wants to know everything at one time.” Then the plan sponsor or provider overwhelms participants with information that is not relevant to what the participant needs to know in order to make decisions specific to his circumstances.
Organized and Relevant
Participants in their 20s do not care about the withdrawal options for 65-year-olds, he points out. It is confounding for them. Education should be relevant to what they need. Participants who are getting married or having children will need information to make a different kind of financial decision from a participant who is nearing retirement. Education should be organized around the type of information that makes sense to participants at that time, Cormier says.
A lot of employee education material is creative and well written, Cormier notes, but will still not get the attention and focus of people because the subject is irrelevant to them at the time it is presented.
A professional adviser might be necessary to help them think through things, Cormier says. It would be like renting a left brain, he jokes. If you don’t have one, you need to borrow someone else’s to help you make what should be a non-intuitive decision.
Several steps to improve communications are outlined in the paper. “Employers can target participants who do not take full advantage of a match program by sending simple postcards with a check box for increasing their contributions to take full advantage of the match,” Martin Campbell, national collective investment trust sales representative at Reliance Trust Company, and a co-author of the paper, tells PLANSPONSOR.
This works even more effectively if the match is designed properly, Campbell says. “This communication can get results because of its simplicity and focus on an important success factor for participants: the contribution level,” he says.
The employer's open enrollment period is another great opportunity to send targeted requests for action such as enrolling, increasing contributions or reallocating assets, Campbell points out. “Many employers require annual benefit elections. Why not extend this process to the DC retirement plan decisions?”
“Rethinking Defined Contribution Communication and Education,” by the Defined Contribution Institutional Investment Association, is available for download on the association’s website.