Even when presented with timely and accurate financial information by fiduciary advisors, employees don’t always make the best decisions for themselves when it comes to saving for retirement. When advisors exclusively focus on financial education and fail to address underlying issues of behavioral economics, there’s a greater chance that poorer financial decision-making may occur. Helping employees overcome the cognitive biases that can lead to bad investment decisions increases their chance for success in becoming retirement ready.
Myopia, in the realm of financial planning, refers to the tendency to make shortsighted financial decisions at the expense of longer term gains. Studies show that when offered the choice of $100 now or $120 in a month, more people choose the immediate reward. However, if the offer changes to $100 in 12 months or $120 in 13 months, they more often elect the higher payout.
One potential explanation for this inconsistency is that when it comes to immediate gratification (more essential to our survival in our evolutionary past), the older limbic system or more emotional part of the brain takes precedence and overrides rational decision-making. However, in the delayed payout scenario, the more recently evolved frontal cortex plays a larger role, allowing for a more measured evaluation of the financial consequences.
So how can a fiduciary advisor help participants overcome myopic tendencies when it comes to delaying gratification and better position themselves for retirement?
1. They can educate employees about myopia, loss aversion and other ways emotions can interfere with rational decision-making when it comes to finances. This can be done in group settings, through one-on-one counseling and in written or online content.
2. Since immediate discomfort can be given more credence than future discomfort, advisors can encourage employees to increase their contribution rates early on, with their first paycheck if possible. Or they may recommend starting or increasing contributions immediately following a raise. These approaches may help offset the effect of myopic loss aversion where retirement contributions are framed as a loss in take-home pay versus as an investment in future financial security.
3. By encouraging employees to imagine in detail the consequences of short-term thinking and how it could negatively affect their financial future, advisors can assist employees in making better long-term financial decisions. They can help employees explore the emotional impact of working longer, downsizing, moving to another state or not being able to travel during retirement. They can also contrast potential projections of lower and higher contribution rates so employees can better gauge the potential relationship between their current contributions and their future retirement lifestyle.
4. The cycle of daily financial news coverage often attempts to attract viewership by presenting information in an overly dramatic and catastrophic manner, which can generate fear and impede rational decision-making. Advisors can encourage employees to limit their exposure to inflammatory financial reporting and offer a more balanced view of historical market performance versus the latest provocative headlines to help offset the negative impact of financial media.
Fiduciary advisorsdon’t need to break out the inkblots help employees overcome myopic tendencies when in comes to their retirement planning. Often, all that’s necessary is a little education, practice, practical advice and some encouragement to see beyond the bend in the road to keep them on track for retirement readiness.