2. www.RetireReady.com
How Advisor-Driven Education Motivates Participants
“A penny saved is a penny earned.” While there is no record of Benjamin Franklin ac-
tually saying these words, the wisdom of saving cannot be denied.
The 401(k) retirement plan is the principal retirement savings mechanism for Ameri-
ca’s working class. Almost 80% of all Americans have access to a workplace-
sponsored 401(k) plan. With total assets of nearly $5 trillion, these plans present a
tremendous opportunity for the average worker to save for a healthy retirement with
an employer’s support.
However, every opportunity presents challenges. For a 401(k) plan, these challenges
include low participation and inadequate deferrals. The employer’s retirement plan
may be the main source of retirement income, yet too many workers either do not
participate or contribute at levels that won’t allow them to maintain their standard of
living in retirement.
Advisors need to understand participant apathy, including its causes and potential
solutions. Doing so can help advisors grow their business while better serving their
clients.
3. The Problem: Participant Apathy
Most Americans think about retirement, and all Americans want to have a secure re-
tirement in which they can maintain a comfortable lifestyle and pursue the activities
and goals that are important to them. Saving for this type of retirement requires
forethought and discipline. For most people, this means using an employer-
sponsored 401(k) plan.
Unfortunately, even though people want a secure retirement and have a means of
saving, many do not participate in their company’s retirement plan. According to the
US Census Bureau, 59% of eligible employees are not participating in a 401(k) plan.
And those who do participate rarely contribute enough to meet their retirement
goals. In an analysis of its own defined contribution plans, Vanguard found the aver-
age contribution is only between 6% and 8%.
Participant apathy is troubling. Most people genuinely want to save for retirement,
yet they fail to take the necessary steps to do so. What forces are hindering partici-
pation and contribution levels?
Human Behavioral Tendencies
One force working against 401(k) participation is human behavior. The field of be-
havioral finance sheds light on how human nature affects our financial decisions, in-
cluding saving for retirement. Research in this area has revealed two tendencies that
explain participant behavior.
First, people have a natural tendency toward inaction. Although workers know that
participating in a retirement plan is beneficial, many simply do not join. Knowing
this, plan designers have introduced auto-
enrollment features. Rather than having employ-
ees opt into a plan, auto-enrollment has all em-
ployees participate by default. Workers may
choose to opt out, but they are unlikely to do so
given our natural tendency toward inaction.
Second, people tend to give greater weight to re-
cent events than to events in the future. How does this play out in retirement sav-
ings? Participants think, “I’ll increase my contribu-
tion next year.” But when next year arrives, they
don’t follow through because they perceive more
pressing present needs for that income. Plan de-
signers are overcoming this tendency through au-
to-escalation, which automatically increases par-
ticipant contributions each year. By removing the
need to make a decision each year, auto-
escalation increases retirement savings.
Inertia
n. indisposition to motion,
exertion, or change
Hyperbolic Discounting
Given two similar rewards,
humans show a preference
for one that arrives sooner
rather than later.
www.RetireReady.com
4. Another force working against 401(k) participation is a lack of engagement, which is
often attributed to plan advisors’ reliance on ineffective retirement education meth-
ods. Many participant meetings simply fail to engage attendees. Too many advisors
distribute generic brochures with general plan information and then talk about murky
concepts like asset allocation and plan fees. They conclude by suggesting that em-
ployees log into the retirement plan web portal to see their information.
The employees, who have a natural behavioral tendency toward inaction, have just
sat through a boring participant education meeting, and now they are put in the driv-
er seat and expected to seek out more information online. Is it any wonder that
these efforts don’t increase participation in the 401(k) plan? It does not make sense
to ask people to go to a web portal, review their balance and contributions, and take
the initiative to make changes.
What these plans need is advisor-driven education that engages and motivates em-
ployees to take action in the simplest, most convenient way possible.
Auto-enrollment and auto-escalation mitigate negative human tendencies, but they
aren’t the end-all. While they remove certain challenges presented by human behav-
ior, they do not engage participants in their retirement planning. For that, education
is key.
www.RetireReady.com
Lack of Engagement
5. The Solution: Advisor-Driven Education
Advisor-driven education is a powerful concept. Instead of asking participants to
overcome their natural tendencies and educate themselves, advisors drive and con-
trol targeted education to overcome common obstacles to retirement saving.
Advisor-driven education uses a three-pronged engagement process to connect per-
sonally with participants: connect, internalize, and initiate. Let’s unpack the three
components of the engagement process to understand how they help participants in-
ternalize the information and then motivate them to take action.
Step 1: Connect
Advisors begin engaging participants by connecting them to the information being
presented. This cannot be done by handing out generic materials about investing and
asset allocation, or by sharing icebreaker jokes or anecdotes. Participants connect
when the information being presented is both relevant and understood.
The most powerful thing an advisor can do to make this connection is to provide each
participant with simple, personalized information. Participants connect when they re-
ceive a brief report that shows them the size of their retirement gap and how bridg-
ing that gap would affect their take-home pay. The information must be relevant
(specific to their retirement) and easy to understand (without the minutiae of asset
allocation, Monte Carlo methods, fees, and funds). If participants are not ready for
retirement, then the report must show in the simplest terms the available options
and a clear plan for improving retirement readiness.
Providing personalized, easy-to-understand retirement readiness materials creates a
powerful connection and inserts participants into the retirement planning process.
www.RetireReady.com
6. Step 2: Internalize
Advisor-driven education focused on engagement has two distinct advantages. First,
it overcomes the natural human tendency toward inaction, which too often results in
doing nothing and never visiting the 401(k) web portal. Second, it puts actionable,
personalized information directly into the participants’ hands. Doing so ensures that
participants face their retirement savings situation, at which point many realize they
are not saving enough for retirement.
As participants review their own information, they connect with the process and
begin to internalize what they have just learned. For those who are not on track for
retirement, this internalization helps them understand their predicament and the
need to make changes if they want to improve their chances of a healthy retirement.
Step 3: Initiate
Once participants have connected with the process and internalized the information,
they are motivated to take action to get themselves back on track. The personalized
report helps them understand that they aren’t doing enough. They can see the retire-
ment projection and understand the options available to them to get back on track.
They are motivated to do something about their retirement shortfall, and they are in
the room with the person who can best help them get the ball rolling: the advisor.
www.RetireReady.com
7. The Benefits of Advisor-Driven Education
Proactive, advisor-driven education has benefits for participants, plan sponsors and
advisors.
Participants obtain a deeper, immediate understanding of their retirement
situation. They know precisely what they need to do, and they are in the room with
the advisor who can help them make the necessary changes. They receive not only
education that connects them to their retirement situation, but also motivation and
guidance to take action. This improves their chances of a healthy retirement.
Plan sponsors benefit from advisor-driven education when they witness increases
in participation levels and increases in deferrals. Furthermore, because participants
understand and appreciate the education, they are more inclined to roll other assets
into the plan. Employees who are ready for retirement are less stressed, more effi-
cient, and less likely to delay retirement—all of which benefit the plan sponsor.
Finally, advisors benefit when the education they are providing results in higher plan
participation, increased contributions and a greater number of participants who re-
quest one-on-one meetings for in-depth retirement planning. Many advisors state
that their business has more than tripled with this advisor-driven approach. The new
approach allows advisors to differentiate themselves from all the other advisors who
continue using traditional, passive techniques. When advisors have all the tools
needed to help participants understand and internalize their information, they can
more easily move into individual meetings, often discovering unmanaged assets that
can be rolled into the plan. And satisfied plan sponsors are loyal to advisors who mo-
tivate and engage participants.
At the end of the day, when advisors take control of the education process by engag-
ing participants with personalized retirement information and projections, they create
the opportunity to significantly grow their business and help others. It’s a win-win-
win situation for everyone involved.
The Retirement Analysis Kit (TRAK)
If you are ready for retirement readiness education where everyone wins, a few sim-
ple tools can help you take control. The Retirement Analysis Kit (TRAK) helps you ef-
fortlessly create personalized reports that directly engage participants.
Find out more at www.RetireReady.com
www.RetireReady.com