How many workers would perk up if you told them they might be forfeiting almost $30,000 a year in retirement income that they already have? It's there, right now, and they don't even know it; their own inaction is causing them to lose it. Why? Because plan sponsors aren't telling them.

Here's the crazy thing: The plan sponsors aren't even aware they're not telling their employees. It all comes down to semantics and philosophy. Most people think incentives are more attractive than penalties, that carrots are better than sticks, that you catch more flies with honey than vinegar. All this may be considered common sense, but in the real world of behavioral economics, loss aversion tells us the negative is more effective at influencing behavior than the positive.

In a 2016 study, researchers found more people would meet their daily goal of 7,000 steps a day if they were threatened with monetary penalties every time they failed to meet the goal than if they were offered a reward of the same amount every time they met the goal. How much more? About 30 percent more.

This has implications for retirement savers. If we get more people to save enough to receive the maximum company match, they can retire wealthier.

It doesn't seem like we're that far off from seeing most people receive the maximum company match. A 2015 study indicated 3 out of 4 people contributed enough to receive the full match. The 25 percent who failed turned away an average of $1,336 in free money their company would have normally given them.

This might sound small, but over the course of one's career, it really adds up. In fact, it adds up to nearly three-quarters of a million dollars if today's 22-year old forfeits this annual amount every year until retirement at age 70 (assuming an 8 percent annual return).

Viewed another way, the average worker who is not currently deferring enough to receive the maximum company match is giving away $29,475 a year in retirement income. How can plan sponsors help encourage employees to avoid this loss? Well, “loss” is the key word here. Traditionally, companies refer to their portion of the 401(k) contribution as the “match.” This incentive reads more like the reward for walking 7,000 steps a day. “Do this and we'll give you that.”

If we use the weight loss study technique as a guide, plan sponsors would instead shift to a “Don't do this and we'll take that away from you” approach. Instead of saying “We'll give you a dollar for every dollar you defer,” companies should say “At the beginning of the year you start with “x” amount of dollars. For every dollar less than your deferral goal, we'll take away a dollar from that starting amount.”

If this approach works the same way in a 401(k) setting as it did for weight loss, a sizable chunk of those employees not responding the “match” terminology will respond to the “take away” phrasing.

And they'll be a whole lot wealthier for it.

Instant Insights /

Could this technique help workers retire wealthier?

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