Five Behaviors That Sabotage Retirement Savings

Years of education, communication strategies and support haven’t done as much to move the needle on retirement plan participant retirement readiness as plan sponsors and advisers hope to see.

For America Saves Week, Prudential wanted to answer a simple question. Why is long-term savings so hard for participants?

According to Jennifer Putney, vice president of Total Retirement Solutions at Prudential Retirement, the firm turned to the behavioral sciences to formulate an approach that would help them understand the behaviors that help or hinder decision-making.

The numbers say that 10,000 Baby Boomers retire daily, Putney says, and more than half aren’t prepared to support themselves, a figure she calls startling. “We wanted to understand why this is so hard,” she tells PLANADVISER. “The industry has done a wonderful job educating participants and delivering information about the importance of retiring with the kind of income that will be sustainable.

After talking with experts in the academic world who specialize in human behavior, Putney says the answer is fairly simple. “We’re not bad planners, and we do have some self control,” she observes, “but our brains are hard wired to take care of immediate needs.”

The firm’s research uncovered five innate human behaviors that cut across all economic groups, behaviors that may have dire consequences for participants’ secure retirement:

  • Underestimation: “I don’t know how long I will live.” They are hesitant to plan for a retirement that may last 20 years or longer, Putney says.
  • Procrastination: “I’ll do it later.”
  • Optimism bias: “It won’t happen to me.” 
  • Peer pressure: “I just can’t resist (that vacation or a new car).” Putney notes that peer pressure can also spur someone to make short-term decisions based on market volatility.
  • Immediate gratification: “I want it now.”

One tactic for plan sponsors to use is defaults, which Putney explains as a principal approach used by behaviorists to help overcome these innate human tendencies. “Plan sponsors can create plan design to help everyone get into the plan,” she says. Auto features—automatic enrollment to start, combined with automatic deferral increases to raise the savings rates every year—help participants overcome the urge to spend instead of save.

Well-diversified fund options and asset-allocation models are useful to help participants avoid short-term decisions made in the face of market fluctuations.

Peer pressure can often sway people in their savings habits, Putney says. It is the herd mentality, when people feel everyone else is doing something. Overreacting to a situation is another sub-optimal behavior. “If the market tanks 800 points in one day, people may panic and feel they have to do something,” she explains. “But these overreactions often lead to poor decisions.”

Steady, long-term investments that don’t require an individual to make changes in their fund lineup will help to overcome those biases.

Next, Putney says, behavioral financial experts suggest frequent messaging and helpful hints to remind participants about the importance of saving for retirement. “Help them understand how close they are, what their surplus or gap may be,” she says. “Keep those messages in front of participants all the time. They constantly need the messages to help them overcome the hardwired human behavior.”

Frequent messaging helps get people on the right path, Putney says. “Once the saving is going in the right direction, they begin to gain confidence about the decisions they’ve made,” she says. “They can see the value it’s bringing, and that is what can help them overcome these innate human behaviors.”

Plan sponsors need to message participants consistently and frequently. This helps to reinforce the importance of staying on plan and remind them where they are. A robust, sustainable communication program maximizes opportunities to participate in the plan. Tracking the success of the plan is another key part, Putney says, and results can be shared with participants, especially if the plan sponsor has accepted the challenge of making sure that all employees are on track for a successful retirement. “If they take ownership of that as a goal, I think sharing how well the plan is doing can be very powerful,” Putney notes.

Putney suggests that plan sponsors hold an event that gets everyone focused. Using sticker boards, she says, they ask people to identify the oldest person they know. “When a number of employees respond and you create a visual, the evidence becomes clear,” she says. “People are living longer: to their 80s, 90s, even 100s, and this is the kind of longevity all of us can expect.”