25 April 2019

Fiduciary Can Successfully Motivate 401k Investors

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Recent research conducted by Boston Research Associates and The National Association of Retirement Plan Participants (NARPP) shows only one in four plan participants trust their recordkeeper, a popular source of employee 401k education. According to a 2012 Gallup survey, only 1 out of 9 people rate stockbroker as having a “very high/high” level of honesty and only 1 out of 7 have a similar view of insurance salespeople. How bad is this? It ranks among politicians, ad men and car salespeople. That’s not the kind of company that endears one towards trust.

This presents a particularly perplexing problem for financial service providers to want to successfully motivate 401k investors to do the right thing. Fortunately, there are proven psychological tools available to do precisely that. Dr. Robert Cialdini, author of Influence: The Psychology of Persuasion, has studied these tools extensively. He has categories them into a half dozen categories he refers to as the “Six Principles of Influence.” We’ll summarize them here:

Liking –If you like someone, you’re more likely to buy their argument (or anything else they’re selling). And it goes beyond liking someone’s inside, it also apply to liking someone’s outside. That’s why so many companies hire attractive people to fill positions that require a great deal of customer contact.

Scarcity –Be careful about this one, though. You can’t just be a “boy who cried wolf,” especially if people are predisposed not to trust you. Crying wolf will only confirm that distrust. Rather, use the economic principal behind this phenomenon to your advantage. For example, we all know the company match in most 401k plans can be likened to a scarcity. That “first 6% match” dictate runs out at year end, when everything resets and we start counting from zero again.

Reciprocity – “If you scratch my back, I’ll scratch yours.” How many times have you heard this? It’s so effective, however, that it’s outlawed in certain industries. For example, do you know it’s illegal for a plan fiduciary to receive compensation in return for making certain decisions concerning the disposition of plan assets? Lawyers call this a “prohibited transaction.” This is a very powerful influencer. It’s why companies give away so many free examples. They do you a favor and, in return, you’ll do them a favor by buying their product in the future.

Commitment and Consistency – How do you memorize something? Many people will either write it down or practice saying it repeatedly out loud. When you’re trying to memorize something, this works. Even if you’re not trying to memorize something, even if your don’t want to believe what you’re writing down or saying out loud, the very act of doing it will persuade you. Why? Because you’re making a commitment. No matter how small, committing to an idea or goal either orally or in writing increases the chances of believing that idea or achieving that goal. This is where those silly affirmations come from.

Social Proof – In which case would you feel safer: camping in the woods by yourself or camping in the woods with a group of people? Believe it or not, in some ways you’re actually safer camping by yourself. In a group, if you hear a strange noise and nobody does anything, chances are you won’t do anything either. And that’s a problem if that strange noise is an approaching bear. People tend to mimic other people.

Authority –In terms the 401k education environment, this one is a bit dicey. One way to demonstrate authority is to showcase your technical prowess in critical retirement matters. “Expertise” is one of four forms of authority. Not all forms of authority can successfully overcome the trust threshold we identified way back at the beginning of this article. For example, the lowest form of authority is “Entitlement.” It’s based on position and titles. Entitlement isn’t a good weapon against mistrust. But even Expertise has a hard time disabling the lack of trust issue.

The next form of authority is called “Engagement,” and involves the use of informal contracts and commitments. It incorporates two of Cialdini’s Principles of Influence, Liking and Reciprocity. Still, it’s a long relationship-building effort that might not be practical for most 401k educators.

The highest form of authority is called “Earned.” This is where the true power resides. This is the ultimate psychological tool to use when motivating 401k plan sponsors and participants to do what’s in their own best interests.

Some have blamed speakers for ineffective 401k education programs. They say the content is filled with too much jargon or the subject matter simply too dry. Others place the blame squarely on plan sponsors and employees. At least one study suggests it’s neither of these, but that it lies solely with the lack of trust in the service providers. No matter which is true, all these hurdles can be surmounted by the use of proven psychological tools. It is possible to persuade and motivate 401k plan sponsors and participants to save early, save more, and invest correctly.

Click here to access the full article on Fiduciary News.

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