A new survey suggests that human emotions can cause mistakes in retirement plan investing--and also suggests what employers can do to help employees make better decisions. The report, Psychology, Emotion, Investing and Retirement: Exploring Participant Behavior in Defined Contribution Plans, released by global financial services provider ING, identifies common emotional and behavioral drivers that "can cause barriers to adequately preparing for retirement financial security."
For example, many people suffer what ING calls "information overload" and "analysis paralysis"--that is, people become overwhelmed by the number of choices within a retirement savings plan and make no choice at all. Others fall victim to procrastination and inertia: they put off contributing to their employer's retirement plan even though they know they should; or are participating, but not saving as much as they should. Others make irrational investment decisions based on "arbitrary rules of thumb, familiarity, overconfidence, and fear of loss" instead of using analytical tools, according to ING.
"The power of emotional behaviors and their impact on how individuals invest cannot be underestimated," explains Brian Haendiges, senior vice president, ING Defined Contribution. "But there are ways for companies to help their employees make better decisions when it comes to investing in their workplace retirement plan. For employers, there's a new dynamic to building, implementing, communicating and managing defined contribution plans, such as 401(k)s, 403(b)s and 457 plans, given the vastly expanded role they are being called upon to play in helping employees plan for their future retirement income."
The ING survey report discusses how use of employer match, automatic enrollment, contribution increases, a limited fund selection, and other plan design elements can help employees make "beneficial decisions." ING also advocates "ongoing and simple communication (versus simply relying on traditional education / enrollment meetings') about retirement plan investing" as a way to "help employees feel good about participation decisions, understand their options and make the appropriate investment decisions."