Skip to main content

You are here


Rethinking Paternalism in Retirement Plans: A Scaffold Effect

401(k) Education

The discussion of companies as “paternalistic” has been broached, in the context of challenging the notion that, to some extent, companies are or should be paternalistic. 

For example, in a recent Nevin and Fred podcast, Fred Reish told the story of explaining to his young daughter what a plan fiduciary is—to which she replied, “Mommy is my fiduciary.” This adorable anecdote prompted co-podcaster Nevin Adams to ask whether we should be referring to companies as “maternalistic” instead of “paternalistic.” My initial reaction was that was a somewhat progressive notion, especially in this industry, followed by the thought that we should probably take gender out of this discussion altogether. 

Subsequently, at the recent Plan Sponsor Council of America’s national conference, speaker Malika Terry with UPS noted that the company is moving away from a “paternalistic” approach to their retirement plan in recognition of the fact that many of their employees will not retire working for them—and what the company wants to do is set them up for success in the future regardless of where they go. UPS is approaching this with an eye toward changing the corporate culture by how they use benefits to attract and retain employees. 

This resonated with me in a few ways. If we think of companies as parental in any way (and I would argue that we should not, that the notion of an altruistic company that takes care of their employees is pretty outdated and not what employees are looking for in a work environment, as people are looking for more autonomy and flexibility at work, but I digress...), perhaps we should be thinking about something called “scaffolding.” 

Recently I listened to a podcast that interviewed Harold Koplewicz, author of a book titled The Scaffold Effectthe premise of which is that parenting resilient, capable kids should focus on providing the support needed to eventually launch children into the world who can take care of themselves and be successful (whatever that looks like to them). Provide the support, the scaffolding, and then as “the building” beings to stand on its own, slowly remove the supports until it is independently stable.

Scaffolding a Retirement Plan

If we apply the scaffolding approach to organizations, to organizational philosophy, and down to retirement plans, it leads me to a “teach me how” philosophy versus a “do it for me” approach. And as I think about a “teach me how” approach, I think of how a best practice in plan investment design often has a few different tiers, from the “do it for me” group (target date funds, managed accounts) to the “do it myself” tier (brokerage accounts). Indeed, the industry has focused on “do it for me” solutions with automatic features and “set it and forget it” investment options that will ultimately—maybe—prepare people for retirement with little to no interference from them. Now the industry is focused on how we can help employees with decumulation strategies, including automating retirement income by providing “do it for me” income products within a retirement plan. 

The notion of taking care of employees by making it easy for them to do it themselves has some merit. It harkens back to the notion of paternalism and the era of defined benefit plans, when people typically worked for the same company for 30-plus years, retired, and lived comfortably in retirement on what was provided by that company. The reality is, that just doesn’t work anymore. We see it in the turnover rates at companies, in how few employees feel ready to retire and are working longer, and in the fact that half of working adults have no retirement savings. 

Teach Them How

In response to this lack of retirement preparedness, we have seen an increased focus on financial wellness. While the definition of it remains unclear, generally the notion of providing financial wellness tools to employees is predicated on the acknowledgment that people need to be taught basic financial concepts and be able to have a handle on their personal finances before they can focus on preparing for the future and some vague notion of retirement that seems to be unattainable. So perhaps we need to think of financial wellness programs not just as a way to get individuals to save for retirement, but also in terms of providing the scaffolding needed for long-term financial security. This may look very different from traditional retirement plan education and may include additional benefits geared towards “teaching them how” to do it themselves. 

“Teach me how” won’t work for everyone and there are real barriers to this, especially depending on the education level and needs/desires of the workforce. It should still be coupled with automatic features—which we know work—to get people saving who otherwise would not, but the best bet for that individual’s long-term financial success is to include the explanations and options alongside automatic enrollment with ongoing education. 

Why Should You Care? 

You might not care, but if you—or your plan sponsor clients—are looking to change and/or create a corporate culture that purports to care about their employees, to be an inclusive organization that wants employees to succeed as a way of retaining high performers and top talent, then a scaffold approach may help. 

The tone of education matters. The inclusivity of education matters. I have never liked being told what to do (who does?) and have always preferred to be told why and how it works and then gather all the info to make the decision I think is best for myself. It may be why I opted out of the plan when automatically enrolled into it at my very first job (when I knew nothing about plans). I was told to just do it, it’s the right thing to do, without an explanation of why. They said, “Its free money! Don’t leave free money on the table!” My reaction was along the lines of, “Yeah right, nothing is ever free and there is always a catch. You want me to put my money in now and in 45 years I will get free money? I think not.” I guarantee you I was not the only new grad with that reaction, which is so rampant in retirement plan education. Instead of the top-down, paternalistic, “I know what is best for you” approach (which can be the underlying message of some of the “do it for me” approaches), we need to respect participants’ ability to make their own informed decisions and provide the information they need to make them. 

We keep hearing about the tight labor market and how companies are pivoting the best they can to try and attract and retain top talent. The pandemic has shown us that employees want more flexibility at work, but they are not just looking for the flexibility to work at home and on their own schedule; they also want more autonomy at work. They don’t want to work for an authoritative paternal figure; they want to work for a collaborative one who values them as individuals and is willing to “teach them how” versus “telling them how” to be successful in the long run.

So maybe it’s time to rethink the paternalistic and/or maternalistic approach to corporate and retirement plan structure and focus on how we can provide the support necessary for employees to become successful, strong buildings all on their own. 

Hattie Greenan, MA, is the director of research and communication for the Plan Sponsor Council of America (PSCA).