Investor behavior and 401(k) statements

Putnam Investments, 5/5/2014

One of the greatest challenges to achieving successful retirement saving outcomes is investor inertia. The lack of willingness to take action can result in a tendency for 401(k) savers to stay with a default deferral rate or allocation model. In fact, without incentive, some workers may not participate in their employer-sponsored plan at all.

In the wake of the 2008 financial crisis and ensuing recession, inertia was compounded by feelings of helplessness as investors watched an estimated $5 trillion disappear from retirement accounts in the 2008–2009 slump.

Engaging with your 401(k)

For most 401(k) savers, the most tangible experience with their retirement savings happens every three months, when quarterly statements arrive in their inboxes or mailboxes.

A lot can be learned about investor behavior from the simplest of actions, such as the act of opening a statement or studying its contents. Putnam looked at investors’ interactions with their 401(k) statements, both before and after the financial crisis. In 2004, investors  were in the second year of recovery following the dot-com bubble. In 2014, retirement savers are five years removed from the Great Recession.

Did you open the most recent statement from your 401(k) provider? 1, 2

How carefully did you review this statement? 1, 2

The confidence factor

How confident are you in having enough money to live comfortably in retirement? 3

How do you see the economy performing in the coming year? 1, 2

Inertia, combined with losses and reduced expectations about the future of the economy, may be seen to correlate with savers' lower rates of engagement with their statements over the past 10 years.

Personalized, actionable information

It will take more than a quarterly statement makeover to get retirement savers more engaged in their financial future. Financial communications need to evolve and adopt the online marketing practices that touch us every day. Retirement plan providers need to be more like Amazon and less like Sears & Roebuck.

Plan providers have access to a wealth of data about savers, including age, compensation, and deferral rates. Presenting personalized, actionable messages in the context of lifetime income could provide the “nudge” needed to increase engagement.

  • Many savers are leaving money on the table by not taking full advantage of their employer’s matching contribution. Segment and target these individuals, and demonstrate how maximizing the match can lead to greater savings at retirement age.
  • Savers over the age of 50 are eligible for catch-up contributions to their plan. Monitor participants’ birthdays and provide the necessary information to help them take advantage of this feature.
  • Give savers a before-and-after snapshot of their paycheck as they raise their deferral rates. Help them visualize the tax advantages of increasing their contribution.
Savers need personalized information, delivered at the right time, and in the right format and frequency. By shifting the education and communication model from broadcast to personalization, savers could become more engaged in their retirement, leading to more successful outcomes.

Putnam Participant Poll conducted online among 2,774 participants from April 26 through June 3, 2004, in association with Brightwork Partners.

2 Putnam Lifetime Income Survey conducted online among 4,148 participants  in January 2014 in association with Brightwork Partners.

3 2014 Retirement Confidence Survey, Employee Benefit Research Institute and Greenwald & Associates.