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Defined Contribution

Plan-design nudges need to take into account participants’ emotions — Dartmouth professor

As defined contribution plan sponsors employ "nudges" to increase participation and savings, they shouldn't ignore the role of emotion in participants' decision-making, said Punam Keller, professor of management at the Tuck School of Business at Dartmouth College.

Current nudges such as auto features and an opt-out vs. opt-in strategy "do not manage emotions," Ms. Keller said in a keynote address Wednesday at the annual conference of the National Association of Government Defined Contribution Administrators in Philadelphia. These nudges "are all focused on feasibility — not desirability."

Understanding participants' emotions — ranging from anxiety and fear to sadness and regret — means plan executives must be empathetic. They need to think about participants' feelings, "not just make things easier" for them to contribute and invest to retirement plans, she said.

To be a good marketer, "you need to be a good listener," said Ms. Keller, referring to plan executives' efforts to educate and communicate to participants about plan benefits. "To be a good listener, you need empathy."

Careful language plays a key role in plan communication, said Ms. Keller, explaining her concept of "enhanced active choice." She used a hypothetical example of different ways sponsors could encourage an employee to participate in a plan. They could use the opt-in approach, telling participants to check a box on a form indicating their interest; they could offer automatic enrollment, telling participants to check a box if they didn't want to participate; and they could give them an "active choice" with two boxes — one saying they will participate and one saying they won't.

However, there's also "enhanced active choice," she noted, which adds more discussion to the two-box approach. One box says: "Yes, I want to enroll in the firm's 401(k) plan to ensure that I will enjoy a comfortable lifestyle for the rest of my life even after I stop working." The other box says: "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."

This strategy motivates participants to minimize what psychologists call "anticipatory regret," or a person's feeling of negative consequences of a decision before he or she actually makes it. Given participants' inertia or fear of making retirement savings decisions, Ms. Keller said the use of enhanced active choice can lower the barrier to "going forward" rather than "doing nothing."