Behavioral finance strategies improve the odds

Generally speaking, we don’t encourage being shifty. But applying a few innovative moves in your 401(k) plan could result in increased retirement savings for your employees. That’s because, when it comes to money, subconscious perceptions can torpedo a plan participant’s success.

 Applying behavioral finance principles may help employees overcome obstacles that often keep them from making rational financial decisions. Here are a few financial behaviors that could be sabotaging employee retirement savings, along with ideas from the International Foundation of Employee Benefit Plans (IFEBP) that may serve to counter them.

Loss Aversion

401k-pension-enrollmentPeople tend to dislike loss more than they like gains. As an employer, you can capitalize on this tendency with the language you use to communicate about the plan. For example, “Would you rather pay yourself or the government?” or “Increase your retirement savings and cut your taxes,” is much more effective than “Stop missing out on your retirement plan match.” Although both communicate the same message, says the IFEBP, the former packs a more powerful punch.

Herd Mentality

We all like to be included, and that means we look to others to figure out our next move. As you communicate about your 401(k) plan, take advantage of this tendency by discussing what others are doing with regard to saving. For example, say something like, “80% of ABC employees contributed to their retirement plan last year.” Or get even more specific about the group you’re targeting with this message: “Nine out of every ten new hires say “yes” to saving 15% of their pay for retirement.” The IFEBP says that breaking down the message to specific groups — such as new hires, people over age 50, or those working at a specific location — can be most effective.

Order for Advantage

Faced with a long list of choices, most people hone in on entries at the top. Unless the list is particularly long, they may recall only the last few items. When providing a list, consider the order in which you include entries. For example, if you present a list of investment funds available in the plan, the tendency may be to list the choices from least risky to most risky. As a result, you may find the majority of participants select very conservative investments or, if the list is long, very aggressive ones because they only remember the last few funds on the list. Instead, consider reserving the top of the list for investments that are likely to be appropriate for most participants, such as target date or balanced funds.

There are many more principles of behavioral finance that may help in your 401(k) plan communication efforts. Find out more about the IFEBP’s suggestions at

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For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

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© 2019 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.

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