A good negotiator begins with an arbitrarily high price, then "concedes" to a lower price. You feel like you're winning even if you're paying more than you originally intended. Oh, well. Better luck next time.

Unfortunately, when anchoring appears within the retirement plan environment, it can have devastating long-term consequences, (see "How Anchoring Hurts 401(k) Retirement Savers," FiduciaryNews.com, December 14, 2017). We see through capriciously low deferral targets (usually centered around 3%) as well as almost anything dealing with investments (benchmarking to a haphazard index rather than what the saver actually needs).

As bad as anchoring can be, do you know anchoring can also be used to encourage better decision making?

After all, anchoring represents an example of heuristic inertia – decision-making based on mental short-cuts because it's easier. "Easier" is the operative word here. We've already seen how it can work in a positive way. Here are just two examples that I'm sure you're quite familiar with:

Example #1: Participation

Bad anchoring: opt-in plan design. This requires an employee to take positive action in order to participate in the company's 401(k) plan. The "anchor" is to "do nothing." In this case, doing nothing means not participating in an automatic retirement savings program. This is generally not in the best interests of the employee.

Good anchoring: opt-out plan design. This requires an employee to take positive action in order not to participate in the company's 401(k) plan. The "anchor" is still to "do nothing." This time, however, doing nothing means participating in an automatic retirement savings program. This is generally in the best interests of the employee. We call this plan design feature "auto-enrollment" and it has proven successful at increase plan participation, particularly among younger employees who stand to gain the most (via the duration of compounding returns) by saving at their age.

Example #2: Investment options

Bad anchoring: traditional plan menu design without a qualified default investment alternative (QDIA). Before the 2006 Pension Protection Act (PPA), too many employees were placing their long-term assets in short-term investments like stable value funds. They did this because they were "safe" investments. Of course, in terms of the long-term growth goals most employees require, these investments aren't safe at all because they generally can't generate the long-term returns needed by the typical retirement saver.

Good anchoring: modern plan menu design with QDIA. Once the 2006 PPA defined the QDIA, including them in plan menus has become the standard. This accomplished two things. First, it redefined "safe" in the eye of employees. Previously, "safe" was an FDIC-insured bank account. Now, "safe" is a professionally managed portfolio specifically designed for long-term growth. Second, the "D" in QDIA stands for "default," meaning the employee need take no action as the plan automatically places the retirement savings into this investment. Recall the importance of the word "easier" mentioned a few paragraphs above.

What's the lesson from these two examples? Yes, anchoring can be a bad thing.

It gets worse. Anchoring is pervasive. It's human nature. There's almost no escaping it.

The martial arts has developed a strategy to use when confronted by an clearly overwhelming enemy. It's called Jiu-Jitsu and it means redirecting the strengths of your enemy to your advantage. It turns out, the best way to defeat anchoring is to pick an alternative anchor. That's what we see in the examples of both auto-enrollment and the QDIA.

There are plenty more situations where anchoring exists in the 401(k) environment. Are you prepared to perform an anchoring Jiu-Jitsu?