Funding the Future Self

To their detriment, plan participants often fail to opt in to in-plan financial advice—but that may be changing.

Retirement plan research shows that making enrollment automatic is crucial to plan participation. However, auto enrollment only goes so far in addressing retirement preparedness. It tends to put people into the plan’s base model, and while this approach is prudent from a fiduciary perspective, it doesn’t always result in an approach to retirement savings that remains relevant to individuals throughout their lives.

Although many plans have a customization option that could help with this issue, low-information investors aren’t likely to take advantage of that without being prompted. Plan sponsors and recordkeepers are attempting to change this, but current behavioral science research suggests there is still considerable room for improvement.

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The Big Disconnect

“The problem is people are disconnected from their future selves and they tend to hyperbolically discount the future,” says Professor Punam Keller of the Center for Business, Government & Society at Dartmouth’s Tuck School of Business. “That creates a number of problems when we are thinking about financial planning. People tend to focus on the financial issues right in front of them and put off savings, as we know. But also, the user experience within financial services and retirement is not great from a behavioral science perspective. People are flooded with information and questions that lack any tangible context.”

Examples of this range from basic investment risk questionnaires to the more in-depth questions financial advisers tend to ask about big goals like retirement.

“When we look at how these questions are presented, it really goes against everything we know about good survey design or effective information gathering,” Keller says. “People get asked about what their goals are and they say, ‘I want to have enough money to do what I want in retirement.’ That’s not a goal. But most people don’t know what they want to do in retirement, so it makes no sense to ask people this question. We’re asking people to value their net worth and their risk tolerance and we aren’t giving them any context about how to do it or what it means, and those are the first questions in the list—so people get panicked and turned off immediately.”

She notes that, based on her research into how people tend to respond to questionnaires and other types of information gathering, if someone can’t answer a question easily and it feels like there are big stakes attached to it, the individual is more likely to put off answering for as long as possible. This means people are less likely to take a proactive approach to retirement preparedness until they are very near retirement, which limits their options and their ability to course-correct if they find out that they have some gaps to fill.

There are generational issues, too. Asking a Millennial or member of Generation Z about their financial goals is more likely to elicit ironic laughter than a conversation about investment strategy. Both generations are faced with high financial hurdles such as student debt, which, according to the Center for Retirement Research at Boston College, means that they tend to contribute less to their retirement plans, as they instead put more toward paying down debt. Consequently, they have significantly fewer retirement assets.

Many other financial milestones that could help build wealth, such as owning a home, are largely out of reach for these generations, which puts more pressure on retirement contributions to cover the gaps. Relevant financial information and advice could be especially helpful for these generations as they look for solutions, but experts say the information would have to be put within this broader context to get people to engage.

‘People Don’t Compartmentalize Their Finances’

David John, senior policy adviser for AARP’s Public Policy Institute, notes that recent innovations such as financial wellness programs can help get plan participants more engaged earlier on.

“These programs are obviously new and are still being adopted, but what we have seen from the really high-quality programs is that it is easier to get people to engage if you’re offering them current and future solutions,” he explains. “So, for example, emergency savings funds that can be used anytime—having that frees people up to start thinking about the future. Or having a student debt payoff matching program can free up dollars that can then go into a retirement fund.”

John emphasizes that participants of all ages are looking for not only relevant advice and solutions, but also information that comes from unbiased sources. “There are big trust gaps everywhere,” he says. “Plan sponsors really have to think critically about who is giving the information and what the information says.”

He notes that some European plans have had success with providing information through user dashboards. This information can help spur people to do more research or further engage by providing information to the plan or an adviser in order to get more customized services.

Some recordkeepers in the U.S. are also starting to rethink how information is presented on their retirement platforms. Empower Retirement, a Colorado-based recordkeeper, has recently updated its onboarding experience to guide participants through a process that is designed to get more information and provide a customized experience.

“What we’re trying to do is pull people into the site and keep them engaged,” says Claudia Step, senior vice president and chief customer experience officer at Empower Retirement. “We’re working with our plan sponsors to craft messages that are targeted to their participants and have a clear call to action. Employees don’t compartmentalize their retirement savings. So we’re really focused on having very customized messaging that is relevant not just to retirement but to their broader financial plan.”

Pay Attention to Stories

Ongoing participant engagement shouldn’t begin and end with questions. Recent research on target-date funds from Morningstar suggests that greater customization within product design could also help keep retirement plans relevant throughout the life of a participant. The research notes that when participants get put on the same glide path regardless of factors like age, wages or goals, they could end up working longer to cover gaps in their retirement savings.  

AARP’s John notes that setting up automatic financial counseling sessions at certain ages might help people course-correct if the one-size-fits-all plan no longer serves their needs. “To the extent that you can make interventions opt-out rather than opt-in, like we’ve done with enrollment, you’re likely to have a better uptake rate,” he says.

Keller adds that giving people stories and scenarios to think through can also help participants see themselves in their financial plan. “Our research shows that the context you give to women, for example, is going to be different than what men need. Women live longer, they tend to think about what goes to their kids, they just tend to think about more eventualities than men,” she says. “If you can help women understand how to plan for that so that they don’t end up in situations they wouldn’t otherwise choose, that’s going to be helpful. People learn through stories. If they can relate to a story, they will try to emulate what they learned.”