You can help employees save more by reframing the terminology you use and timing communications to better help them so they won't be doing 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 wreak havoc on planning. You're really looking forward to go see the premiere of that smash hit movie, but the aches and sniffles make you want to stay home and rest. Here's the real-life paradox that arises from this situation. No matter how bad you feel, if you've already bought your tickets, you're going to the movie. If you haven'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 something of value that you already possess. If the tickets are in your hand, you'll be buying popcorn at the cinema. If that ticket money is still in your pocket, well, you can always see another film another day.

We often view loss aversion as a negative thing. We tend to believe offering a reward works better than threatening to take something away. Academic studies suggest it's really the other way around. You can use that phenomenon to change employees' savings behavior (see, “What Bagels, Loss Aversion, and Reframing the Company Match Can Show the 401k Fiduciary How to Help Employees Save More Money for Retirement,” FiduciaryNews.com, February 27, 2018).

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

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

Here are three ways to do this (with a shout out to Jack Towarnicky, 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 says companies often do this once a year in September or periodically in the employee's quarterly statement. This is the least dramatic way to reveal the stick, since the carrot remains prominent. The statement indicates what the employee contributed, what the company matched, and how much more the employee needs to contribute for the remainder of the year to “true-up” to the maximum company match. It's a subtle way to say “get on the stick” without using that stick as an overt threat.

2. Year-End Forfeited Company Contribution. Unlike in the above option, this statement doesn't focus on what the 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's important this report not appear only at the end of the year. It must be part of the quarterly statements, because it is the threat of loss that will cause the change in behavior. Once the loss occurs, it's too late to change that behavior (at least for that year).

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 phone applications, but I'll keep it simple. The idea is essentially to go beyond what's lost immediately and highlight the amount lost when the time comes to begin taking the Required Minimum Distribution at age 70½. If you want the loss of retirement income to really hit home, in addition to reporting the dollar loss, also provide a list of activities/purchases the employee is currently on track to possess but would be lost because of the loss of retirement income.

Now, I'll admit this last one is a bit of a stretch. It's likely people 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 employee fail to save the amount necessary to retain the entire company contribution.

What do you think? Do you think plan sponsors might be willing to look out for their employees' best interests by reframing how they describe their company's contribution to the employee's 401k account?

It's certainly nothing to sneeze at.