The psychology of retirement planning
How can businesses help employees see a clear picture of retirement?
Friday, March 14, 2014 7:00 AM
You may think retirement planning is about the numbers.
Best practices for an employer plan
Principal Financial Group Inc.’s Jerry Patterson listed best practices for an employer’s retirement plan:
- Automatically enroll your employees, starting at a 6 percent deferral savings rate.
- Increase the deferral savings rate by 1 percent each year until the employee is at 10 percent.
- Make the default investment choice a target date fund.
- Stretch your employer match. Meaning, instead of matching 100 percent up to a 2 percent deferral rate, the employer could match 25 percent up to an 8 percent deferral rate. The employer pays the same amount, but the employee has an incentive to pay more into the 401(k).
How much money will you need? How much should you save every year? Study after study has concluded that most Americans aren’t saving enough for retirement. But if you are an employer trying to help your workers save for retirement, success is less about the numbers and more about understanding psychology.
It’s about fear.
A December study by Fidelity Investments found that only a third of Americans are on target to cover at least 95 percent of their retirement savings goals. Other similar studies draw similar conclusions. That sounds scary, right?
It’s about uncertainty.
Only 23 percent of Americans between the ages of 40 and 75 have calculated how much they will need to save for retirement, according to a survey conducted last year by Ameriprise Financial Inc.
It’s about shame.
One boss who had met with employees about their retirement planning said people nearing retirement age have apologized to him because they hadn’t saved enough.
And underlying it all, it’s about the human tendency to care more about your present self than your future self.
The numbers are real, they are relevant, and sometimes they are downright depressing. But if you really want to help your employees prepare for retirement, and ultimately help your business retain and attract employees, scaring them with statistics isn’t the best motivator.
In fact, that might not motivate them at all.
Instead, think about how they’re feeling and behaving.
Understanding how we got here
Before getting to the solutions, let’s look at how this became an issue in the first place.
Joel Duncan, president and CEO of Merit Resources Inc., doesn’t consider himself a retirement planning expert, but 85 percent of the company’s clients participate in Merit’s sponsored 401(k) plan, so he keeps pretty close track of the trends.
Duncan sees four factors contributing to Americans falling behind on retirement saving:
1. The switch from company-provided pensions to opt-in 401(k) plans
2. Longer life expectancy
3. A decrease in personal savings
4. Increased access to consumer credit and resulting increase in personal debt
About two years ago, Principal Financial Group Inc. decided to evaluate how to better help people save for retirement, said Jerry Patterson, the company’s senior vice president, retirement and investor services. The industry, and Principal, had hit a wall as far as its success rate with retirement planning.
Principal worked with global innovation firm Doblin and “some of the biggest thinkers out there on behavioral finance theory” including Moshe Milevsky at Toronto-based York University and Laurie Santos at Yale University.
“What we discovered was human beings have a hard time caring about their future self,” Patterson said. “There’s a ton of science that would say that’s the way we’re wired.”
The good news is, employers can help.
How to persuade your employees to enroll
The most obvious and effective way to get employees to save through their company’s retirement benefits is to automatically enroll them. Statistics back that up. About 40 percent of people will enroll in a plan the first year they are eligible without automatically being enrolled, Patterson said. If they are automatically enrolled, fewer than 10 percent of employees will opt out. Automatic enrollment is a staple of Principal’s new “PlanWorks” strategy. Another obvious way is to provide an employer match.
“Everybody will do their best to put in at least the minimum to get the maximum,” said Brian Hood, co-founder and principal of Legacy Financial Group.
Duncan said Merit saw employers suspend, reduce or eliminate their match during the recession, but that trend started to reverse in 2013.
After those two tools, employers are finding that it takes the right approach to increasing employees’ awareness and education about saving for retirement.
“You’ve got to meet a person when they’re ready to have the conversation,” Hood said. “We’ve got a very small window when something happens in somebody’s life where they think, ‘Oh, I guess I’ve got to pay attention to this and I’ve got to change my habits right now.”
As an employer, a good time to have that conversation is when you give an employee a raise, Duncan said. If you give an employee a 3 percent raise, for example, encourage that person to take 1 percent and put it into a 401(k).
Another way to look at it, Patterson said, is to tailor to your approach to what people are actually going to do, not what they say they will do. In other words, even though people may intend to save for retirement, they often won’t take the extra step to follow through.
That doesn’t mean you shouldn’t preach personal responsibility, says Hood. People can choose to put themselves on the right path.
“My future is in my hands,’ he said.
Ultimately, Duncan said, the message is simple: If you haven’t started saving for retirement, start with a dollar today. That’s a dollar more than you had saved yesterday.
How not to persuade your employees to enroll
Part of Principal’s research involved interviewing people who were near retirement, and one of the company’s conclusions was that scare tactics don’t really work, Patterson said. People who are behind on retirement planning already know they are behind. “Our sort-of going theory is that can be really counterproductive,” he said.
It’s a good thing to help employees know how much they’ll need for retirement and how much to save to get there, but be careful with how you present it. Duncan has found that throwing too many big numbers at people can discourage them, and be more of a deterrent than a motivator. It’s nice to know what you need to save to live comfortably in retirement, but for someone who hasn’t saved anything, it can be pretty daunting.
In other words, he said, it’s like telling people who can’t walk to the end of their driveway that their first step should be to run a marathon.
“End of the world, or those kind of threats, we have not found in our practice here to be encouraging,” Duncan said. “It’s encouraging to say, ‘Take the first step.’”
What about someone who is already behind?
Most people have a mental image of a person who is 50-or-so calmly sitting down with a financial adviser to put the finishing touches on retirement planning. In 15 years, that person can coast off into the sunset of retirement. Well, that’s just not true, Patterson said.
“We’ve done a lot of research on this issue, and we have concluded that all the inertia and all the human wiring things that got in the way of someone during a lifetime of working, living, carry right with them into retirement,” he said.
What Principal found was that people at the age of 50 are still in the prime of their career, and if they hadn’t started thinking about retirement to that point, they aren’t much more likely to do that just because they turn 50. Instead, the company’s research found that people are more likely to take action when they are just a few years away from retirement.
“Maybe you will have to work; maybe you won’t. Let’s not freak out about that,” Patterson said. “Let’s focus on the resources you have. And let’s sort out things like what are your basic needs expenses that you do not want to ever feel a threat around, what are your dreams and hopes, and how do we start to sort that all out in a plan that makes sense for you?”
Duncan, as an employer, said he’s had employees come into his office and apologize because they haven’t saved enough “because they’ve been beat up and done the retirement calculators.”
His message to them: Don’t let the start stop you. In other words, you may be behind, but a dollar put away today is a dollar closer to where you need to be.
Once you acknowledge that an employee is behind, “there’s no reason to dwell on it,” Duncan said. “You can put in the plan that’s most appropriate for someone who only has 10 years to save. And that kind of sensitivity creates a greater engagement in that kind of time.”
Another thing to keep in mind is what a person really needs to live on in retirement. The retirement planning industry has painted a picture of playing golf and taking a lot of vacations, Hood said. That’s not always realistic, or even what people really want out of retirement. Sometimes the battle is to get people to realize what they really need, or don’t need, to be happy in retirement.
“If I can get people to objectively think about their circumstances like that, they’re in,” Hood said. “They get it.”
Why employers should care
According to the Society for Human Resource Management’s State of Employee Benefits in the Workplace report released in December, only 18 percent of organizations reported leveraging their benefits program to retain employees, but the companies that do so will gain an edge in coming years, Duncan said. Of those that reported using benefits as a retention tool, 57 percent said they use retirement savings and planning as a tool, and organizations indicated that retirement planning will become increasingly important over the next five years. “I’m looking at it not only as a social responsibility for my employers, but also as a tool for attracting and retaining talent,” Duncan said.
Having a plan is important, but so is marketing it. A lot of companies have plans, but mention them as an afterthought in the hiring process.
“If you have a clear strategy around marketing the 401(k), you’ll win that game,” Duncan said. “Most aren’t doing it.”