A major airline recently redesigned its website so mileage club members saw a bar at the top of the home page showing their progress to attain a certain level of elite mileage status. Clearly, the progress bar is intended to appeal to the frequent fliers’ competitive and acquisitive streak, resulting in more miles flown on the airline as the customers seek the next elite mileage status level.
A progress bar might not be a bad idea when it comes to 401(k) statements. Today, many participants open their statements and see their balances, returns, gains and losses. This frames the 401(k) plan as an investment and savings vehicle, but not necessarily as a source of future retirement income. Imagine that participants opened their statements and immediately saw their progress in reaching a certain retirement goal. Might this inspire them to do more?
The Employee Benefit Research Institute’s “Retirement Confidence” survey suggests it will. The 2010 survey found that 44 percent of workers who simply calculated a goal retirement amount report that they made changes to their retirement planning as a result.
Most often, 59 percent said they started saving or investing more, according to EBRI. Unfortunately, the EBRI survey also shows that just 46 percent of workers (or their spouses) have tried to calculate how much money they will need in retirement. The message here seems to be that when engaged on the topic of retirement income adequacy, workers can be inspired to take positive actions. However, the message also seems to be that motivating workers to care about retirement income adequacy can be difficult.
A number of major record keepers are already embracing the concept of reframing the discussion from account balances to income in retirement. That’s a good start. Some have incorporated this type of information into participant statements.
Many also provide retirement income projections and tools on their benefits site. In some cases, these tools even come with recommendations as to how to close the gap between the amount of retirement income the participant is likely to have, and how much is needed—e.g., how much more the participant needs to save; how much longer the participant may need to work; and better ways for the participant to invest.
Behavioral economics has shown that such reframing can have important psychological effects. It is essentially the premise of automatic enrollment: Change the framing of 401(k) participation from opting in to opting out and chances are that workers will go from non-savers to savers within the plan. As such, reframing participants’ focus from current balances to income in retirement may be a means of transforming their view of the plan from short-term savings vehicle to long-term retirement plan. Mental accounting says that once a worker places money in an account that is mentally labeled “retirement,” that individual is less likely to use it for non-retirement purposes. This could lead to fewer loans, withdrawals and cash-outs at termination or retirement.
But, is showing a retirement projection number motivating enough? In a study of “affective communication,” Sheena Iyegar of Columbia University and Shlomo Benartzi and Alessandro Previtero of the University of California, Los Angeles, compared the results of how much students intended to save for retirement when they were given various motivations. The first group of students was shown how saving at certain levels would translate into an account balance at retirement. This group pledged to save 10.9 percent. Another group was shown images of apartments—from squalid to luxurious—that they might be able to afford in retirement given certain savings levels. The average intended savings rate soared to 14.5 percent.
Of course, both retirement income projections and the retirement income progress bar can have their downsides. For one, the entire concept of retirement income adequacy probably won’t resonate much with very young workers. A 25-year-old is unlikely to be excited about investing in a plan where the payoff seems to be at least 40 years in the future. Behavioral finance also has a lot to say about people’s inability to delay gratification. As such, the company matching contribution will always be a popular feature of 401(k) plans, as will tax deferral benefits. Touting these plan attributes should remain a staple in plan participant communication.
Further, some employees may find that the gap between the income they are projected to have in retirement and what they are projected to need is so large that achieving a financially secure retirement may seem beyond their grasp. If the progress bar results are too grim, participants may conclude that it’s not even worth bothering to save at all.
Clearly, the progress bar should be closely tied to realistic action steps. Moreover, the fewer the clicks on a record-keeping site that it takes to effect a change in contribution levels or a reallocation of investments, the more likely it is that participants will act.
Finally, some plan sponsors may worry about fiduciary liability. Projections—no matter how sound the assumptions—are unlikely to be perfectly accurate. What happens if participants reach retirement, only to learn their progress wasn’t as good as they thought? Earlier this year, the Department of Labor and the Treasury issued a Request for Information on lifetime-income solutions in defined-contribution plans. A common thread in the responses was the desire for greater guidance from these agencies for plan sponsors who want to educate employees on their projected retirement income, but who may be deterred by concerns about fiduciary liability.
Regardless of the drawbacks, the need to spur employees to action is real. A recent study by Hewitt Associates Inc. found that the typical worker needs to amass 15.7 times pay in order to maintain their pre-retirement standard of living. However, Hewitt found that employees with access only to defined-contribution plans (no defined-benefit plan income) can expect to fall short of this mark by an estimated 4.3 times pay. The news is probably even worse than the Hewitt study suggests, as the typical worker in the analysis is assumed to contribute to the 401(k) plan during a full career with no gaps in service or cash-outs.
So it is time for a retirement income progress bar on 401(k) participant statements. More broadly, it is time for developing any creative way to frame a dialogue with employees about retirement income adequacy.
After all, it is certainly better to cause workers to know how well they are doing in achieving their retirement goals now—when there is still time to do something about it—than when they reach age 65 and it is too late.
Workforce Management Online, August 2010 -- Register Now!