Many employees make sub-optimal decisions when it comes to savings rates, asset allocations, in-service withdrawals and retirement distribution options. The result: Many of them are not even on the path to retirement readiness, let alone retirement-ready.
Though past decisions can’t be reversed, DC plan sponsors can begin to improve this gloomy outlook at relatively low cost — or even no cost — simply by altering their plans’ “choice architecture” — that is, how choices are presented to employees. Subtle changes in plan structure and participant communications can help counter certain natural tendencies participants have to making decisions that are sometimes not in their own interests because although people make these sub-optimal decisions due to these subconscious tendencies, they do so in highly predictable ways. The technique is a product of behavioral economics.
The November “Spotlight” report from Sibson Consulting offers three examples of where understanding anticipated sub-optimal choices can help employers mitigate these choices and improve employees’ readiness for retirement:
• Communicate the match in a new way
• Add an escalator
• Streamline the investment menu
The five-page white paper also recommends these three steps in applying choice architecture in a DC plan: mine your data, identify the confusions at play, and develop a strategy.
