Behavioral finance: Getting workers to do the right thing

NASHVILLE — Getting people to save enough for retirement — it's a simple-sounding goal. But it's not at all easy to execute, three panelists at a session at the NAPA 401(k) Summit made clear. How hard do you nudge participants to save? How do you educate them? And what about plan sponsors — how hard do you push them?

"As advisors we're judged by how well the participation in the plan is," said Randall Long, Managing Principal, Sageview Advisory Group. "Inertia is the greatest issue in this industry, getting people to save for retirement."

How to deal with it?

No. 1: Be willing to have the tough conversations with plan sponsors.

Plan sponsors need education too, just as participants do. Having a chat about not just auto-enrollment and auto-escalation but plan matching is incumbent on advisors, the panel agreed.

"Ignorance in our business is not bliss. We have to urge our plan sponsors to make different decisions," said Phil Fiore, Jr., Senior Institutional Consultant, Senior Vice President, FDG Group – UBS Financial Services. "These auto-programs are so beneficial. It's incumbent on us as professionals to push them."

"If you don't have auto escalate, you're sending a message to participants that it's okay to stay where you are," Long said.

Plan matches are another area where a conversation must be had. "I think we need to be more dynamic in how we're looking at matches. We need to educate our plan sponsors. If you put 6, 8, or 19 percent as an option, a lot of participants will take 8. We're doing a lot of harm by putting 1 or 2 percent," Fiore said.

He added, "If I can't get that conversation right, then shame on me. But if it's taking longer than I like, we will spend a lot of time on the education front. We will track what the participants are doing and then we will track what the education [we're offering them] is doing. Then we bring that back to the plan sponsors and show that their own people want that stuff and why not make it happen."

"We approach it from an income replacement standpoint. We have to draw the connection between what a lump sum can provide as far as a monthly income. Just being able to illustrate the cost of people not being able to retire, that's important," Long said.

"There's this awesome tool that defines for a treasury department the cost of not getting participants to retire at a certain age. You can show your finance department what the real cost of not extending the match can be for that company," Fiore said.

"Having our plan sponsors interact together, maybe from similar industries, and share the successes of what they've done. Get your committee member out to network and hear how other plan sponsors have done it," Long said.

A question from the audience pointed to advisors hearing plan sponsors say they fear being too paternalistic with employees, too Big Brother-ish. How to deal with that?

"Plan sponsors that hide behind that argument of [fearing they're] Big Brother–I am willing to have a hard conversation with them, to make them uncomfortable. If they suggest at any level it's not their responsibility, they're totally wrong," Fiore said.

"I have fought that as well, as far as [sponsors fearing] being too heavy handed," Long said. "I try to give client testimonies of plan sponsors that were reluctant and put [education] in place. One thing that surprised me this year was that one of the most highly attended webcasts was around Social Security. So we need to be aware of how to help participants look at Social Security. HSAs –we need to be more knowledgeable about health care. I see down the road a convergence of health care and retirement. So it's incumbent upon us to understand that need."

No. 2: Make plan participants do the right thing, whatever it takes.

"It's about educating them young," said Michael Whitehurst, Vice President, Wealth Management Advisor, Merrill Lynch – Bank of America. "If you're not talking to participants about a SWAN (sleep well at night) fund you need to. College kids are coming out into the real world and they have to figure out how to pay for it. They are going into debt and will get derailed from their saving plan."

Fiore concurred. "It's not fair to participants if we just go out there and tell them to save more. What we incorporate in our educational schematic is we shared with them little anecdotes about how to do it."

As an example he mentioned an app called Red Laser that lets you scan a bar code in a store and see the prices for the same item at other stores within a several mile radius. "We're trying to teach people little tricks to get 10 or 12 dollars into their 401(k). We write this little newsletter that offers tips. But we need to push participants harder," Fiore said. "It's not paternalistic — that's a weird stance our plan sponsors have."

Especially with millennials, education is important, Whitehurst said. "It's helping them understand the future value, if they don't have a great credit score if they don't have a SWAN fund, how that affects them. Once you get them comfortable with a budget and getting them on track, then they're going to feel more comfortable saving. And you'll have a holistic employee ready to walk out the door at 65 or 67."

When asked about why the financial industry doesn't borrow an idea from the wellness industry — say, a financial version of a FitBit — all three panelists agreed that gamification is something plan sponsors can do. But an actual device? "Talk to the recordkeepers."

A question from the audience mentioned the challenge of gamification in financial wellness, that it's hard for people to disclose things such as credit score or other challenges. Another audience member noted the possibility of doing it among peers, comparing generally across a person's demographic rather than comparing to actual people. And rewarding good financial actions with such things as a gift certificate or other reward.

An audience member asked about the risk that people are being nudged to save, using auto-enrollment and auto-escalation, but aren't learning anything financially. "Where's the line between education and just making them do the right thing?"

"I would rather have one hundred percent of the people doing the right thing rather than knowing what they're doing. I think that at 65 they want a chunk of money. How much do they need to know? They do need to be pushed along," Fiore said.

"They're so overwhelmed with the first job, you just have to get them started," Whitehurst said.

"Education will change. There will be more digital solutions," Long said. "Look at TED talks — there's a huge impact with videos delivering a message."

Perhaps we're all coming to the party a bit late, delivering financial education at the worksite? "We probably need to start financial literacy in grade school," Long said.

Where do you have the power right now to make a difference? "Push your plan sponsors," Fiore said

Using behavioral economics in underwriting

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