"Sticks and stones can break my bones, but words will never hurt me," goes the familiar playground retort. But is it true? No, I'm not talking about the latest PC craze for living in a world where everyone has self-esteem.
I'm talking about the real impact a few simple words can have on whether or not a 401(k) participants live the retirement they desire. In fact, a recent study ("Yale Study: A Few Extra Words Can Make a Major Difference for 401(k) Investors") suggests exactly that.
I'd recommend plan sponsors – and the fiduciaries who advise them – take a close, hard look at the results of this research paper. And then get on the phone to their recordkeepers to start drafting the right language for those quarterly participant statements.
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Anyone familiar with the direction of behavioral finance these last couple of decades won't be surprised to see what's going one. The basis of this research is a term called anchoring.
Anchoring is a psychological phenomenon where people tend to use the last thing seen (or heard or read) as the basis for answering the next question – no matter how totally unrelated that question is. It's a concept that's been proven (sometimes hilariously) in quite a few studies.
The Yale researchers felt they could extract some practical usage from this often silly human trait and, in doing so, actually help real people. I've met and spoke with James Choi (the lead author of this study) on several occasions and I can attest he's genuinely fascinated with the science of getting people to make better decisions with their 401(k) plan.
For those of you not inclined to read an academic treatise, here are the basic conclusions of the paper:
1) If you give an numerical example in the participant letter (or email) showing what would happen if the participant increased his savings rate, use a higher number. The number – whether low or high – acts as an unintentional cue and can affect behavior.
2) This pertains not just to obvious examples, but seemingly innocent asides buried within otherwise appropriate disclaimers.
3) It's not the total dollars of the match, but the match threshold (i.e., the maximum percentage deferment the company will match) that drives savings up. The higher the match threshold, the more employees will save.
We've already seen numerous studies that demonstrate the most important decision employees must make with their 401(k) plans is the decision to save. These little words, no matter how insignificant they appear, can have a tremendous impact on the savings decisions participants make; thus, on the retirement lifestyle they will eventually live.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
