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P&I East Coast Defined Contribution Conference

DC plan executives should offer ‘enhanced active choice’ to build trust — conference keynote

Punam Keller
Punam Keller

Plan sponsors must increase trust among participants to improve participation and increase contribution rates because traditional strategies — known as nudges — have limitations, said Punam Keller, associate dean for innovation and growth at the Tuck School of Business at Dartmouth University.

Nudges include automatic enrollment and automatic escalation, but “they cannot increase trust,” Ms. Keller said in a keynote address Monday at the Pensions & Investments' East Coast Defined Contribution Conference in Miami. “Most nudges focus on feasibility instead of desirability.”

Seeking to improve trust, Ms. Keller has developed the strategy of “enhanced active choice.”

Using principles of behavioral psychology, Ms. Keller said enhanced active choice seeks to create in participants a desire to avert a feeling of regret, which leads to a wish to exert greater control over their actions. In turn, this attitude leads to greater trust.

“Nudges are designed to make things easier,” she said. “Nudges work better when there is high trust.”

She cited one example of the difference between traditional nudges and enhanced active choice — a hypothetical case of a plan promoting enrollment through different traditional strategies. One approach is a form that asks a participant to check a box if he or she wishes to enroll in a 401(k); another asks to check a box if the person doesn't wish to enroll. And a third gives the participant a choice on the application form: “I will enroll in the 401(k) plan,” or “I will not enroll.”

The enhanced active choice would offer a form with two choices: “Yes, I want to enroll in the firm's 401(k) plan to ensure I will enjoy a comfortable lifestyle for the rest of my life, even after I stop working,” or “No, I don't want to enroll in the firm's 401(k) plan even if this step will help me avoid a poorer lifestyle knowing some day I will have to stop working.”

Building trust is essential, and that means presenting messages that avoid fearful or negative tones, she said. Applying an enhanced active choice strategy bestows control, reduces procrastination and increases trust, she added.

Enhanced active choice makes participants feel more accountable and more in control, as well as more satisfied with their decisions, she said.