As you talk with your clients about retirement readiness, you may wish to keep in mind the three participant behaviors Shlomo Benartzi (a leading authority on behavioral finance) has identified that stand in the way of positive 401(k) plan outcomes:


Plan sponsors are probably most familiar with employee inertia. The incorporation of "auto" features (auto-enrollment, auto-escalation and auto re-enrollment) into 401(k) plans along with the addition of professionally managed investment options like target date funds, can successfully address employee inertia. Recordkeepers Vanguard and The Newport Group report that approximately one-third of the 401(k) plans they administer have auto features. Experts believe that within three to five years the majority of 401(k) plans will adopt these plan design elements.

Loss aversion

Loss aversion may be characterized as valuing the avoidance of loss over the accrual of gains. In other words, participants are more afraid of losing money than they are of not having enough money (as a result of investing too conservatively). In order to overcome this obstacle plan sponsors need to offer target date funds. Most experts believe that 75% to 85% of all plan participants should be invested in target date funds. Left on their own, participants tend to invest too conservatively to keep pace with inflation, or they are prone to attempt to market time, resulting in significant losses.

Model or lifestyle portfolios aren't a solution here since employee inertia comes into play. Both of these types of professionally managed investment options require a positive employee election to move to more conservative options over time. Target date funds do not require any employee interaction since the investment manager adjusts the risk level of the portfolio as time goes by.


Myopia is the hardest factor to overcome. Participants have a tendency to focus on immediate, short-term goals rather than planning for their future. Many participants view the process of saving as difficult and not worthwhile. For example, they may feel that they will be too old to ever enjoy their savings, or they may believe they will pass away before they are able to retire. Regardless of the reason, participants are not eager to fund a future they have a difficult time envisioning. Employee education is the only effective tool to fight myopia.

Plan sponsors are searching for help in identifying and overcoming these obstacles in their retirement plans. As retirement readiness becomes more widely accepted, consultants who can facilitate solutions to these challenges will be in demand.

Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.  Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF).  Mr. Lawton was named as a Top 100 Retirement Plan Adviser by PLANADVISER and a Top 300 Retirement Plan Adviser by 401(k) Wire.  Mr. Lawton may be contacted at or 414.828.4015.

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