Visualizing Retirement

Getting employees to build an "emotional connection" with their future selves may be the key to getting them to save more for retirement.

Tuesday, April 22, 2014
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What would it take to get the employees at your organization to save more for retirement?

Seeing an age-enhanced photo of themselves 40 or more years into the future might help. A recently released series of reports on retirement from consulting firm Mercer and Stanford University's Center on Longevity cites earlier research conducted by the Center which found that when people think about their "future selves," the neural patterns that are activated in their brains are surprisingly similar to those activated when they think about a stranger.

However, the researchers found that when study participants were given the chance to interact with "age-enhanced" digital renderings of themselves, that stranger factor disappeared: They were willing to put an average of 6.8 percent of their pay into their 401(k) plans. This compares to participants in a control group who were not shown such images -- they were willing to contribute an average of only 5.2 percent of their pay.

Many U.S. workers realize they're not financially prepared for retirement. Towers Watson's latest Global Benefits Attitude Survey finds that, although U.S. workers felt more financially secure last year than they did in 2009, nearly six in 10 (58 percent) are still worried about their financial future. It also that, while 23 percent feel very confident of their income sufficiency for the first 15 years of retirement, this confidence level plummets when workers look farther ahead, with only 8 percent feeling very confident of having adequate income 25 years into retirement.

And yet, awareness of a problem and getting people to actually do something about it are two separate things, say experts. 

"Educating employees on the income they'll need for retirement is useful, but it's just not enough," says Fergal McGuinness, a senior partner in New York-based Mercer's retirement consulting business. "Our view is that a number of different tools need to be deployed to move people from awareness to action."

Even people who are better off than many other Americans are having trouble saving enough for retirement, says Paul Vienick, managing director of Merrill Edge, a New York-based investment service started by Bank of America several years ago. Merrill Edge's research finds that 60 percent of all mass-affluent Americans (those with between $50,000 and $250,000 in investible assets) are actively delaying their retirement.

Merrill Edge has just released a mobile version of its Face Retirement tool -- a tool that was inspired partly by the Center on Longevity's findings, says Vienick. The new app lets users upload selfie photos taken with their mobile devices to Face Retirement, which will convert them into life-like 3D animations of their future selves. Users can then share the images on Facebook and Twitter. 

"We were looking for something a little more fun and interactive than a know-your-number campaign -- to get people to think about a very serious topic, but come at it from a very different angle," says Vienick.

Of the nearly 1 million individuals who've downloaded Face Retirement since it was first launched in 2012, 60 percent have chosen to learn more about retirement planning, says Vienick. The tool also computes for users how much things such as a gallon of gas or an airplane ticket will cost when they are, say, 65 in the year 2035, to give them some added context, he says.

"This tool isn't for everyone," he says, acknowledging that, for some people, viewing an image of themselves at 65 or 70 has no appeal whatsoever. 

Shane Bartling, a senior consultant in Towers Watson's retirement practice in San Francisco, says another effective method for getting plan participants to respond more viscerally to the need for retirement planning is to get them thinking about their "FIT" age.

A FIT, or financial independence target, age is the age at which people will have acquired enough savings to support their lifestyle in retirement. Towers Watson's FIT program can calculate for employees -- based on a number of factors, including what they're currently saving for retirement -- the age they'll be when they reach this target. 

"It's similar to age-enhanced photos in that it's something they can connect with their own lifestyle," says Bartling. "It has much more of a tangible feel to it than a simple income projection. Also, it's easy to grasp."

One company found that employees were 50 percent more likely to increase their contributions and deferrals after viewing their FIT age, he says.

"The math on retirement is very hard to do for lots of employees, especially with regard to longevity and the impact of the tax treatment on retirement benefits," says Bartling. "So you need to do the math for them."

The design of today's defined-contribution plans is also a factor that influences employees' engagement with retirement planning, says Steve Vernon, president of Oxnard, Calif.-based retirement consultancy Rest-of-Life Communications and a researcher with Stanford's Center on Longevity.

Vernon's research has revealed that employees generally fall into three categories with respect to how they view retirement planning: "Do it for me," "Help me do it" and "I'll do it myself."

"The 'Do it for me' group usually represents half to 90 percent of an employer's workforce, while the 'Help me do it' group typically represents 10 to 30 percent, and the third group -- 'I'll do it myself' -- is always very small," he says. "Yet, most 401(k) plans are designed for that third group."

Ironically, says Vernon, many employers provide their executives with retirement-planning services such as those offered by The Ayco Co., a financial consulting firm based in Saratoga Springs, N.Y.

"The idea is that executives are too busy running the company to pay attention to their own finances," he says. "Well, employees are too busy doing their jobs to devote sufficient time to their own finances, and would appreciate being told what they should do by someone they trust and respect."

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A small but growing number of companies are incorporating the "Do it for me" approach, says Vernon, automatically enrolling employees in a DC plan at a 6-percent contribution rate that automatically escalates to 10 percent (with a 6 percent company match) over time, with the money allocated into a target-date fund. The money is then converted into an annuity or a systematic-withdrawal scheme for retirement income once the employee is ready to retire, he says. 

"A lot of people just want to be told what to do, as long as they have the flexibility to opt out," says Vernon.

However, employers should be wary of the "anchoring effect" of auto enrollment, says Rob Austin, a consulting actuary at Lincolnshire, Ill.-based Aon Hewitt. Employees often remain at the default contribution rate set for them by the company, even if it's as low as 2 percent or 3 percent. Even without automation, he adds, plan sponsors may unintentionally create an anchoring effect with their matching structure.

"We find that about a third of all people tend to save at equal the maximum match for DC plan contributions, at about 6 percent," says Austin.

Auto enrollment reduces employee engagement on retirement because it requires them to do nothing unless they decide to opt out, he says. Austin cites the so-called "IKEA effect," or research that shows consumers value things more when their own effort -- but not too much effort -- is required to build them (such as assemble-it-yourself furniture from the global Swedish retailer), in arguing that HR can influence employees to save more by requiring them to take a slightly more active role.

"Maybe send out a postcard to employees which lets them check a box allowing 10 percent of their pay to be allocated to a pre-mixed portfolio of mutual funds, which is much easier for them than having to decide how much to save and where to invest it," he says. "Having the employer do everything for you is a great safety net, but it's not going to get people engaged in planning for retirement."

At Newark, N.J.-based Prudential Financial, the company's defined-contribution plan has a 94-percent participation rate among its employees, "which we're quite proud of," says Andy Gregg, vice president of employee benefits.

Prudential Financial offers its employees a number of state-of-the art planning tools, including a retirement-income calculator that lets them create personalized reports and action plans and a "Do It Now" button intended to make it easy for users to implement those action plans. Yet it hasn't stopped its more traditional ways of getting the word out, says Gregg.

"In the old days, everyone did annual enrollment road shows -- they're much less common now, but we're still doing them," he says, adding that the road shows are an opportunity to discuss retirement planning face-to-face with employees. "The most important way to get someone engaged in this topic is by doing a forum."

The Center on Longevity's research also suggests that face-to-face meetings can be more effective in forging a connection between employees and their future selves than, say, sending out glossy brochures. The Center's researchers noted that the way in which modern political campaigns are run is a potent example of this, says Mercer's McGuinness.

"If you look at how campaign budgets are allocated between the 'air war,' or TV commercials, and the 'ground war,' or meeting people face to face, a higher proportion of budgets are being spent on ground-war activities because the return-on-investment is so much higher," he says.

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