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How the Use of Fear May Improve 401(k) Participant Engagement

401(k) Education

While providing communications on retirement readiness can significantly improve participant engagement, the use of fear as a behavioral tool may be a better way to rouse unengaged participants.

That was the conclusion from a recent study by the Defined Contribution Institutional Investment Association’s (DCIIA), led by Warren Cormier of the organization’s Retirement Research Center, which sought to better understand the impact of different types of messaging on engagement among DC plan participants. 

Based on a survey of over 1,000 individuals, nearly three-quarters of whom were DC participants, the study focused on demographic characteristics pertaining to participant engagement, as well as on participants’ increase or decrease in intended engagement, contingent on their prior behavior. 

In the corresponding report, Engaging Participants: Communication Strategies for Defined Contribution Plan Sponsors, DCIIA notes that both encouraging and fear-type messaging works to increase intended engagement in the plan and to prompt action from participants, but cautionary messages were more effective than encouraging ones. 

Fear vs. Encouragement

To test the relative impacts of fear versus encouragement messaging, DCIIA divided its sample into two identical sample groups regarding demographics. One group was exposed to a cautionary, or fear, message style and the other was exposed to an encouragement message style. The study notes that each respondent was exposed to only one of the two messaging styles to avoid contamination of the sample. 

The distinguishing factor of the study was a series of seven questions posed to respondents about how they engaged with plan sponsors or recordkeepers about their retirement savings. A first set of questions sought to gauge current engagement activity of respondents, followed by an intervention, which offered either an encouraging message citing an individual’s progress toward funding retirement, or a cautionary message warning of a retirement savings shortfall. 

The cautionary message focused the respondent’s attention on a retirement income goal shortfall of 29%, noting that the person “will have to make a few changes in order to get to 100%.” The encouragement message began with “Great news! We project you’re on track to reach 71% of your retirement income goal,” while further noting that, “Although you are not at 100% just yet, a few changes can help you reach this goal.” 

Respondents were then asked another set of questions dealing with the same set of factors in the first set, this time indicating engagement intent. Those who had not already indicated engagement on any of the seven factors were given an opportunity to “upgrade” their engagement intentions, the study explains. 

The Findings

According to DCIIA’s findings, either message significantly improved the likelihood of engagement, suggesting that providing any type of retirement income statistic to participants, regardless of how it is messaged, is likely to improve engagement. But between fear and encouragement, fear led to greater post-engagement, an effect that DCIIA notes was “surprisingly robust” across questions and persisted even when controlling for participant demographics. 

Nearly 24% of the fear-message respondents indicated they would think about the percentage of pay they contribute to their retirement account “much more often” versus less than 10% of the encouragement-message respondents. Similarly, nearly 22% of fear-message respondents indicated they would think about their progress toward retirement “much more often,” compared with about 14% of the encouragement respondents. 

Additional findings show that nearly a quarter (24.1%) of fear-message respondents would look “much more often” at their investment options to determine if a change would make sense, compared with only 16.2% of encouragement respondents. As such, the study recommends that plans should consider developing thorough knowledge of their participant bases when developing a communication strategy, as well as relying on resources from their recordkeeper to evaluate their communication strategies. 

One caveat is that the survey covered only intent to take action, so it is not clear what actions participants would actually take, the study observes. Moreover, the analysis considered only the one scenario and does not provide context on participants who are significantly overfunded or underfunded. DCIIA notes that it anticipates a future research project that will explore this issue further.