Low trust levels in financial institutions diminishes retirement savings educational effectiveness

For decades the DC industry has been using education as a key lever to change participant behavior; few would argue that this lever has fallen short of its goals. Improving retirement plan participant behavior requires examining why education has fallen short. The literature sites a variety of execution issues as well as the lack of participant interest, laziness, etc. However, a factor that has never been introduced as a barrier is the level of trust participants have in their 401k recordkeeper. Intuitively we have assumed that trust plays a role in participant behavior, but we now have data that demonstrates the specific magnitude of the impact of trust on retirement savings rates.

Research conducted by NARPP and Boston Research Technologies has revealed that the level of trust one has in their particular 401ks recordkeeper has a profound impact on their retirement savings behavior. Specifically, if trust is high, the participant will defer more income, contact the recordkeeper more often for advice, and use more recordkeeper products. The inverse is also true. But as importantly, participants in a low trust environment have a lower quality-perception of the recordkeeper’s retirement planning education program. Furthermore, they are far less likely to agree that the “information presented is always in their best interest”.

Unfortunately, the same study showed that large and small business retirement plan participants’ level of trust with their recordkeeper is very low. Only one-in-four (26%) participants said they can “always trust their recordkeeper to do what is right”. Given the impact of trust and its low level, even the best retirement planning education program is seriously degraded in terms of its behavioral efficacy. We cannot ignore the fact that higher levels of financial knowledge translate into better retirement savings rates. The DC industry can and should continue to improve its delivery and packaging of education materials. However, until or unless it increases its trust levels with participants, those improvements will have little effect on behavior.