Improving 401k participation

A co-founder of TaskRabbit has launched a new 401(k) plat­form designed to improve 401(k) par­tic­i­pa­tion.

The com­pa­ny, Guideline Technologies, has raised $2M and is going to use three tech­niques to improve par­tic­i­pa­tion:

1. Cut active­ly man­aged funds out, pre­sum­ably peo­ple aren’t par­tic­i­pat­ing in these plans because they’re too expen­sive
2. Improve the paper­work / process; amen, any­thing cor­po­rate IT designed sucks
3. Use big data to have a more respon­sive process; or so it seems by read­ing into the arti­cle

They’re getting it wrong

It’s actu­al­ly quite easy to dra­mat­i­cal­ly improve 401(k) par­tic­i­pa­tion. All com­pa­nies need to do is make them opt-out instead of opt-in (NY Times or National Bureau of Economic Research). No need for new plat­forms, new com­pa­nies, and cer­tain­ly not new tech­nolo­gies. Not con­vinced? Here’s a list of sev­en low- or no-cost ways to increase 401(k) par­tic­i­pa­tion.

Don’t get me wrong. I’d love an eas­i­er to use plat­form. And, I get that I’m not the tar­get mar­ket as I max-out my 401(k).

The thing is, lack of par­tic­i­pa­tion is not a tech­nol­o­gy prob­lem.

It’s a human problem

I have this joke when talk­ing about The Elephant in the Room has a Paycheck:

You know how Americans trav­el over­seas, right? When some­one tells them they don’t speak English, how do the American’s respond? They talk loud­er and slow­er (but still in English).

It’s the same thing finan­cial ser­vices com­pa­nies do. When peo­ple opt out of their prod­ucts, what do they do? They do the same things they’ve always done, only loud­er and slow­er.

Guideline Technologies may cre­ate a bet­ter plat­form, but they’re still talk­ing about mutu­al funds and the same old met­rics for mea­sur­ing suc­cess. Diversify. Growth funds. Watch your costs.

These are all good points, but no one freak­ing cares.

No mat­ter how beau­ti­ful their plat­form is and how much they low­er costs, the fol­low­ing is still most peo­ple’s expe­ri­ence with 401(k)‘s:

Step 1: Look at start­ing bal­ance for the month. (Let’s make up a num­ber: $5,000.)

Step 2: Put in 10% of pay­check pre­tax to 401(k). (Let’s make up anoth­er num­ber $500 a month — that assumes a $60K salary.)

Step 3: Look at end­ing bal­ance, real­ize it’s low­er than start­ing bal­ance even though they added $500.

So, maybe it’s not low­er, but it’s not always going up. And, it’s impos­si­ble to under­stand why. Which, to most non-pro­fes­sion­al investors, feels like a ran­dom result. They put mon­ey in, and some­times they have more, some­times they have less.

Random results do not rein­force habits. Simply put, there are three parts to habit for­ma­tion: the cue, the rou­tine, and the reward. When the rou­tine is reward­ed, the cue will suc­cess­ful­ly trig­ger the rou­tine. When the rou­tine is not reward­ed, we have to push through to keep up. That’s the ten­sion against peo­ple par­tic­i­pat­ing. Making it eas­i­er will cer­tain­ly help to a point, but we know how to increase par­tic­i­pa­tion if that’s all we’re try­ing to achieve — opt-out plans.

What we want to do is have peo­ple par­tic­i­pate will­ing­ly. Joyfully. And that’s not going to hap­pen until we start mea­sur­ing suc­cess dif­fer­ent­ly than we do today.