Participation Challenges to Your 401k Plan
Despite the benefits of company-sponsored 401k plans, many eligible employees decline to participate. What are some of the reasons that guide employees in their choice not to take advantage of saving for their retirement? This quarter, we’ll discuss three psychological factors that may be influencing those who choose not to participate in your plan. According to Shlomo Benartzi, author of Save More Tomorrow, there are three behavioral factors likely affecting employees who choose not to contribute to the plan: loss aversion, inertia, and myopia.
Loss aversion refers to the strong, negative response to loss. According to Benartzi, this inherently human fear suggests that losses we’ve incurred affect us about twice as much as an equivalent gain does, or would, and is “one of the most powerful psychological factors at work in the field of behavioral economics and behavioral finance.” It is only one factor, however, likely in play in a potential participant’s psychological makeup. Also a strong factor is inertia, the inclination for humans to stick with the status quo, a tendency rooted in the dislike for change, especially if it requires physical or mental effort, which would be in play when determining how much and how to save for retirement. Lastly, participants are affected by myopia. This third factor is prevalent in the investment world, and is the tendency to focus only on the short term, neglecting to take into account that retirement planning involves consideration of future, long-term goals. Thinking about the distant prospect of life after working for many years is a difficult task, especially for those who may be struggling in the present.
If you are a plan sponsor and find yourself needing or wanting to increase your employees’ participation in your company retirement plan, we encourage you to take the necessary steps to determine the best ways to do so. For more information on CapSouth’s retirement plan consulting services, please contact us toll free at (800) 929-1001.
