You can help employees save more by reframing the terminology youuse and timing communications to better help them so they won't bedoing this at year's end. (Photo: Getty)

We're going to talk about loss aversion in a moment. But first,let's look at an example of it.

It's that time of year for various ailments. Cold, flu,post-nasal drip, you name it, folks get it. These annoyances wreakhavoc on planning. You're really looking forward to go see thepremiere of that smash hit movie, but the aches and sniffles makeyou want to stay home and rest. Here's the real-life paradox thatarises from this situation. No matter how bad you feel, if you'vealready bought your tickets, you're going to the movie. If youhaven't bought those tickets, you're staying home.

What explains this phenomenon? Loss aversion.

Loss aversion is the fear of missing out on or losing somethingof value that you already possess. If the tickets are in your hand,you'll be buying popcorn at the cinema. If that ticket money isstill in your pocket, well, you can always see another film anotherday.

We often view loss aversion as a negative thing. We tend tobelieve offering a reward works better than threatening to takesomething away. Academic studies suggest it's really the other wayaround. You can use that phenomenon to change employees' savingsbehavior (see, “What Bagels, Loss Aversion, and Reframing theCompany Match Can Show the 401k Fiduciary How to Help EmployeesSave More Money for Retirement,” FiduciaryNews.com, February27, 2018).

The concept is fairly straightforward. The actual companycontribution amount does not change. What changes is the way wedescribe that company contribution.

Rather than focusing on it being a “match” ( i.e., a reward tobe gained) we should frame it as an amount the employee riskslosing. In other words, rely on the stick (loss aversion) ratherthan the carrot (the gain of the match).

Here are three ways to do this (with a shout out to JackTowarnicky, Executive Director, Plan Sponsor Council of America,who took the time to more or less describe these to me).

1. The Mid-Year “True-Up.” Towarnicky sayscompanies often do this once a year in September or periodically inthe employee's quarterly statement. This is the least dramatic wayto reveal the stick, since the carrot remains prominent. Thestatement indicates what the employee contributed, what the companymatched, and how much more the employee needs to contribute for theremainder of the year to “true-up” to the maximum company match.It's a subtle way to say “get on the stick” without using thatstick as an overt threat.

2. Year-End Forfeited Company Contribution.Unlike in the above option, this statement doesn't focus on whatthe employee needs to do to catch up to the company maximum.Rather, it shows the maximum eligible amount the employee “owns,”then reports the amount “lost” by the employee's failure to save.This is a more blatant attempt to induce loss aversion. It'simportant this report not appear only at the end of the year. Itmust be part of the quarterly statements, because it is the threatof loss that will cause the change in behavior. Once the lossoccurs, it's too late to change that behavior (at least for thatyear).

3. Specific Loss in Annual Retirement Income.Towarnicky calls this the “hit people over the head” option. Now,he'd add a lot of bells and whistles and annoying smart phoneapplications, but I'll keep it simple. The idea is essentially togo beyond what's lost immediately and highlight the amount lostwhen the time comes to begin taking the Required MinimumDistribution at age 70½. If you want the loss of retirement incometo really hit home, in addition to reporting the dollar loss, alsoprovide a list of activities/purchases the employee is currently ontrack to possess but would be lost because of the loss ofretirement income.

Now, I'll admit this last one is a bit of a stretch. It's likelypeople view those future retirement possessions as “gains” or“rewards,” not as losses to be averted. Still, you get the idea.Reframe the “match” terminology as a “loss” should the employeefail to save the amount necessary to retain the entire companycontribution.

What do you think? Do you think plan sponsors might be willingto look out for their employees' best interests by reframing howthey describe their company's contribution to the employee's 401kaccount?

It's certainly nothing to sneeze at.