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Article by:
Tess Malone, Institutional
Retirement & Investment Practice Leader
As an employer, you have a unique opportunity to craft new
strategies that will empower and guide your employees toward
reaching their retirement goals. How you address this opportunity
will affect your ability to recruit, retain and motivate the best
workers. It will also determine the financial future of the next
generation of retirees. An understanding of behavioral finance
reveals an important tool for plan sponsors who ¬are charged with
the task of helping millions of Americans provide for their economic
security in retirement: “Framing mechanisms” are the stealth tool
that make it easy for employees to succeed in what for many, is the
daunting task of being their own CFO for their retirement plan. One
of the most powerful things you can do as a plan sponsor is to
understand framing mechanisms and to use their power to shape
employee behavior.
What are framing mechanisms and why should plan sponsors care? To
answer this, we need to backtrack a little and take a look at the
changing relationship between employers and employees and the
current state of retirement planning in America.
Three major forces are converging to reshape the retirement
landscape. First, life expectancy has improved dramatically. In the
20th century, the average lifespan rose from 47 to 78. Older
Americans are healthier than ever before. Retirement, once a few
years’ respite at the end of life, now commonly lasts 20 to 30 years
or more. New generations of retirees are challenged to imagine what
they want to do and achieve—and to prepare wisely to support the
life they want.
Second, the number of retirees is about to escalate as the largest
generation in history—the 77 million-member baby boom
generation—leaves the workforce.
At the same time, younger population groups will grow modestly or
even shrink over the next decade.
Third, the responsibility
for retirement saving has shifted to the individual. Earlier
generations could often count on an employer defined benefit plan,
or employer-paid pension, to see them through their retirement
years. But since 1980, the percentage of workers with defined
contribution plans has multiplied almost fourfold, while the
percentage of workers with defined benefit plans has plummeted from
60 percent to just 8 percent in 20061. Meanwhile, the age
of eligibility for Social Security has risen along with worries
about the federal government’s ability to fund entitlement programs
at current benefit levels for future generations.
Why do you, as a plan sponsor, need to be concerned with these
statistics? The stagnating growth of the labor force will mean
mounting competition for employees. The looming shift from a labor
market where employers hold the advantage to an employee market, in
which employees hold the bargaining chips, means that employers will
increasingly be forced to address employee needs. Additionally,
employees that haven’t adequately prepared for retirement will not
retire. This has a direct impact on plan sponsors’ bottom lines.
Employees that should retire but can’t, will be a drag on the
financial and emotional bottom line of your company.
The most successful companies, the winners in the fight to attract
and retain top talent, will develop an intimate understanding of
their employees’ needs, behaviors, and capabilities and will use
this knowledge to help employees save wisely for retirement. As we
just discussed, financial education is only part of the equation for
success. Framing mechanisms, rooted in an understanding of human
nature and the frailties of our reasoning processes, help employees
to help themselves The following are some strategies to consider
when deciding the best way to help the subset of your employee
population that is failing at effectively planning for retirement
—the group that is struggling to make good decisions on their own.
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(1) “The Pension Crisis and Private Defined Benefit Plans,”
Center for Retirement Research (November 2008)
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