Retirement plan participants don’t always act in their best interest, and the ING Retirement Research Institute set out to find out why.
The plan provider interviewed people who participated or didn’t participate in its plans to find out why they invested like they did or why they didn’t sign up for the plan.
Many employees don’t realize the value of having a 401(k) plan. They are young and they aren’t thinking of the future, said Bob Kaplan, vice president, national training consultant for ING. He shared some of the company's findings on the mysteries of behavioral finance at this week's 2012 SPARK Forum in Palm Beach, Fla.
Some attend their benefits meeting and then don’t make a decision right away, Kaplan noted. Most people who don’t sign up immediately at their benefits meeting never get to it. Inertia takes over. A lot of employees don’t have any experience with investing and it is complicated so the best way to avoid having to make decisions about it is by not participating in the plan, he said.
If individuals are not signing up for their company retirement plan, they are missing out on additional funds, like a company match. They also are missing out on the compounding that happens to their savings over time. If they do participate, many buy too much of their own company’s stock or put too much money away in fixed income producing stable value funds, Kaplan said. Many sign up for their plan but then never go back and reevaluate the investments they chose. They also never increase the deferral from their paycheck, even if they get a raise or a promotion.
That’s why plan design is so important, he said. The top plan design solutions are automatic enrollment, automatic escalation and automatic rebalancing. Many retirement plan vendors offer auto rebalancing, which means a professional will look at a participant’s account every quarter or every six months and rebalance their investments based on what the market is doing.
According to Kaplan's presentation, only about 50 percent of private employers offer a retirement plan but about 75 million full-time workers do not have access to an employer-based plan. Employees who earn between $30,000 and $50,000 a year save with an IRA only 4.6 percent of the time. When this same group has access to an employer-sponsored plan, they save at a rate of more than 70 percent.
There’s a growing trend toward managed accounts, target-date funds or life cycle funds, where a professional money manager handles the allocations for participants, all they have to do is make the decision to go into the fund, Kaplan said.
The best way ING has found to fight the inertia is to do a better job of communicating with employees. It is a matter of education versus communication, he said. Employers who educate their employees about their benefit options usually only do so once a year, while a company that actively communicates with its employees about their plans frequently sends out helpful hints and useful information to reinforce how important it is to save for retirement, he said.
The most successful communication programs try to reach out to participants every two weeks.
ING offers a useful tool called INGCompareMe.com, in which participants can get into the system and enter information about themselves, including their age and their hobbies. They can then compare themselves to others in the ING database who are of the same age and have similar investment strategies. That way they can see if they are ahead of the curve or behind in saving for retirement, Kaplan said.