Procrastination, confusion and a harried lifestyle are all causes of plan member inertia. DC pension plan providers continue to look for ways to break through inertia and help members reach long-term financial security. We’re not asking them to go to financial boot camp. We’re asking them to fill out a form, join a plan, contribute, maximize matching contributions, pick investments that reflect their goals and resist taking money out of these investments before they reach retirement. So what’s the right ingredient?
Throwing more information at members through education and communication works to some degree but doesn’t necessarily motivate them. What’s needed is something economist Richard Thaler calls a nudge. The nudge theory encourages people to make good decisions without imposing restrictions, while leaving all of the poorer choices open. It works two ways: create incentives or remove barriers to achieve a desired action.
DC plan sponsors and their providers can use various strategies to nudge members to act and prolong plan engagement.
There are differing opinions on advice, but we can all agree it helps members take action—especially when they can’t decide which plan, investment or contribution level is right for them. Why not leverage the call centre or on-site education specialists offered through providers to support members in the decision-making? These are critical moments when members are on the cusp of taking action; a nudge makes it a truly simple task.
Most employees have the best of intentions when they participate in an enrollment workshop, but when they leave—forms or online enrollment instructions in hand—they often fail to follow up and act. It’s the same old story—life gets busy, retirement is decades away and the motivation to enrol fades.
Hand out a wireless tablet at these sessions and suddenly employees enrol instantly. According to Mass Mutual in the U.S., wireless enrollment sign-up rates are as high as 90% compared with traditional sign-up rates closer to 50%.
Technology can simplify the interactions with members and enable them to act. Smart-phone applications or mobile-optimized websites can increase accessibility of tools, balances and transactions for the growing number of Canadians who own smart phones. Introducing new media channels such as interactive avatars and social media marketing helps capture the attention of the growing younger workforce.
The default option can be redesigned so that employees are automatically enrolled into their workplace plan at a pre-set contribution rate. A recent analysis by Fidelity Investments in the U.S., where auto-enrollment is permitted, found that only one in 10 employees proactively opt out of the plan.
What’s the best way to reduce member inertia? Nudge them. Remove barriers and create incentives without taking away their choices. While most of the boomer bulge is still pre-retirement, the leading edge has passed age 60 and is now in the “need to start saving” years. If there was ever a time for a nudge, it’s now.
Nadia Darwish is vice-president, client relationships and business development, group retirement services, with Sun Life Financial.
Get a PDF of this and other coverage from the DC Plan Summit.