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How a Fiduciary Can Successfully Motivate 401k Investors to Do the Right Thing

October 15
13:45 2014

Bad news for all those 401k service providers out there: Nobody trusts you. You might think you can tough it out, but then you’d be missing the point. If you really believe your purposes is to help people achieve a comfortable retirement, then 929183_81398393_go_for_the_gold_stock_xchng_royalty_free_300you’ve got to be able to convince them to act appropriately. Of course, you can’t persuade anyone to do anything if they don’t trust you. Fundamentality, that stands as the biggest obstacle to successfully educating both 401k plan sponsors and 401k participants.

Recent research conducted by Boston Research Associates and The National Association of Retirement Plan Participants (NARPP) shows only one in four plan participants trust their recordkeeper, a popular source of employee 401k education. Warren Cormier, CEO of Boston Research Technologies and Chief Behavioral Officer of NARPP writes (in “Trust, Education & Behavior” published by NARPP), “Low trust levels in financial institutions diminishes educational effectiveness.” He says, of all the usual suspects when it comes to ineffective education (e.g., poor content/delivery and employee apathy), “a factor that has never been introduced as a barrier is the level of trust participants have in their recordkeeper.”

Lest you think recordkeepers bear the brunt of this mistrust, it should be pointed out according to a 2012 Gallup survey, only 1 out of 9 people rate stockbroker as having a “very high/high” level of honesty and only 1 out of 7 have a similar view of insurance salespeople. How bad is this? It ranks among politicians, ad men and car salespeople. That’s not the kind of company that endears one towards trust.

This presents a particularly perplexing problem for financial service providers to want to successfully motivate 401k investors to do the right thing. Fortunately, there are proven psychological tools available to do precisely that. Unfortunately, these are the very same tools used by evil doers to brainwash uncooperative victims. Talk about your Machiavellian moment. Dr. Robert Cialdini, author of Influence: The Psychology of Persuasion, has studied these tools extensively. He has categories them into a half dozen categories he refers to as the “Six Principles of Influence.” We’ll summarize them here, with a more detailed synopsis, including practical examples, available via the links within each summary.

Liking – There was something about Gatsby. People are easily persuaded by other people that they like. But we can’t all be Adonis. If you’re old enough, you might remember all those Tupperware parties your mom used to go to. Today we could call it low-tech viral marketing. Cialdini brings it up as an example of the effectiveness of this particular influence. If you like someone, you’re more likely to buy their argument (or anything else they’re selling). And it goes beyond liking someone’s inside, it also apply to liking someone’s outside. That’s why so many companies hire attractive people to fill positions that require a great deal of customer contact. Here are some ways 401k educators can get employees to like them: see “How to Get an Audience of Strangers to Like You.”

Scarcity – Do you want to sell someone something? Tell them there’s only a few left or the offer is available for a limited time only.” The item doesn’t have to even really be in short supply. If people think it’s going to run out, they’ll want to get it. Be careful about this one, though. You can’t just be a “boy who cried wolf,” especially if people are predisposed not to trust you. Crying wolf will only confirm that distrust. Rather, use the economic principal behind this phenomenon to your advantage. For example, we all know the company match in most 401k plans can be likened to a scarcity. That “first 6% match” dictate runs out at year end, when everything resets and we start counting from zero again. If we miss the train on December 31st, that’s it, we’ve missed the train. Learn more about using scarcity to motivate plan participants in “401k Savers: Act Now! Before Time Runs Out!

Reciprocity – “If you scratch my back, I’ll scratch yours.” How many times have you heard this? It’s an adage that has proven itself over and over again in the business world. It’s so effective, however, that it’s outlawed in certain industries. For example, do you know it’s illegal for a plan fiduciary to receive compensation in return for making certain decisions concerning the disposition of plan assets? Lawyers call this a “prohibited transaction.” This is a very powerful influencer. It’s why companies give away so many free examples. They do you a favor and, in return, you’ll do them a favor by buying their product in the future. How powerful is reciprocity. Cialdini likes to tell the story of Ethiopia giving Mexico thousands of dollars in humanitarian aid following the devastating 1985 earthquake. How could Ethiopia afford this? At the time it had plenty of its own problems, between an insufferable famine and a destructive civil war. It turns out, way back in 1935, Mussolini decided to invade Ethiopia. Mexico offered diplomatic support to the beleaguered Ethiopians.  Fifty years later, after that Earthquake, Ethiopia scratched Mexico’s back. Today we’re more familiar with the social media version of this, the “you like me I’ll like you” implied bargain. Want to learn more about how to (legally) use reciprocity to motivate plan sponsors, then read “‘Favor’-ite Ways to Motivate 401k Plan Sponsors.”

Let’s take a halftime break from reviewing Cialdini’s Six Principles of Influence to talk about Chapter 46 of his book Yes!: 50 Scientifically Proven Ways to Be Persuasive. In it, Cialdini reveals the drug that will make you more persuasive. It’s called “1,3,7-trimethylxanthin” or “trimeth” for short. Laboratory studies have shown taking it will make you more persuasive and giving it to your audience will make you more persuasive. There are literally trimeth labs in every office, probably even in yours. What is 1,3,7-trumethylxanthin? It’s caffeine And it’s available in any number of delivery systems, from coffee to colas to power drinks. It really works, but there’s a caveat. It takes about 40 minutes to reach maximum effectiveness and it only works with strong arguments, not weak ones.

Now, back to our show…

Commitment and Consistency – How do you memorize something? This is the question every student, every actor, indeed, every presentator asks of themselves. Many people will either write it down or practice saying it repeatedly out loud. When you’re trying to memorize something, this works. Do you want to know something? Even if you’re not trying to memorize something, even if your don’t want to believe what you’re writing down or saying out loud, the very act of doing it will persuade you. Why? Because you’re making a commitment. No matter how small, committing to an idea or goal either orally or in writing increases the chances of believing that idea or achieving that goal. This is where those silly affirmations come from. It’s also a brainwashing technique the Chinese used successfully on American POWs in the Korean War. Do you think those American POWs trusted their Chinese captors? Of course not. Yet the Chinese were able to overcome this lack of trust and gain what Cialdini calls “automatic unenforced compliance.” Of all the Principles of Influence, Commitment and Consistency is perhaps easiest to achieve within a 401k education setting. To see just a few examples read “How to get 401k Savers to Act in Their Own Best Interest (Even if They Don’t Want to).”

Social Proof – In which case would you feel safer: camping in the woods by yourself or camping in the woods with a group of people? Believe it or not, in some ways you’re actually safer camping by yourself. Why? Alone, you’re more prone to check into those strange noises you hear. In a group, if you hear a strange noise and nobody does anything, chances are you won’t do anything either. And that’s a problem if that strange noise is an approaching bear. People tend to mimic other people. Cialdini tells the story of an experiment that went awry.  To prove the power of Social Proof, researchers sent a small group of people into a larger crowd. One by one they began looking up in the sky, despite there being nothing in the sky to see. Soon, the innocent bystanders started looking, too. But things quickly got out of hand with everyone looking up in the sky. The experiment had to be aborted as it was disrupting traffic. More infamously, there’s the tragic story of Kitty Genovese, who was brutally murdered in a busy neighborhood because no one called the police. It turned out the people weren’t heartless, as headline writers at the time liked to claim. They were just proving the power of Social Proof. Because no one thought to get excited about this screaming woman, no one did. If this gives you a sense of a lemming-like response on the part of humans, you’re right. It also explains why, in a roomful of employees, why the typical 401k education program fails. It also explains the opposite: why viral marketing can be so effective. So we face a conundrum. On one hand, two heads are better than one – if we can persuade a crowd to move in the right direction, the whole lot of them will stampede to that destination. On the other hand, too many chefs spoil the broth – it’s difficult to persuade a recalcitrant crowd. So what’s the solution? It’s untested but it’s brilliant, and you can read about it in “One’s a Crowd: It’s Back to the Future for 401k Education.”

Authority – We’ve saved the best for last. Remember the Milgram experiments in the early 1960s” Those are the ones where the researcher told some unsuspecting college kid to turn up the voltage on folks every time they got an answer wrong. Of course, despite the agonizing screams of pain with each turn of the potentiometer, no electricity ever reached the target. The test was to see how far someone would go to inflict unreasonable suffering on an innocent victim. It turns out, quite a bit. People have this sometimes awful tendency to obey the boss. That’s good if the boss is a good guy. That’s bad if the boss is a bad guy. That’s why we’d like all bosses to act like fiduciaries, but that’s another story. In terms the 401k education environment, this one is a bit dicey. One way to demonstrate authority is to showcase your technical prowess in critical retirement matters. Here’s a way to do it via a hands-on activity either in a group or one-on-one: “How to Use the Retirement Readiness Calculator.”

This type of authority is “Expertise” and it is one of four forms of authority. Not all forms of authority can successfully overcome the trust threshold we identified way back at the beginning of this article. For example, the lowest form of authority is “Entitlement.” It’s based on position and titles. We’re all used to the stereotypical disrespected overachiever who’s the boss in name only. Entitlement isn’t a good weapon against mistrust. In fact, Expertise often trumps Entitlement, as the technical guru is often turned to ahead of the named boss when things really need to get done. But even Expertise has a hard time disabling the lack of trust issue.

The next form of authority is called “Engagement,” and here we see the first evidence of chipping away at distrust. Engagement involves the use of informal contracts and commitments – think of those “cross my heart hope to die” promises you made as a kid. It incorporates two of Cialdini’s Principles of Influence, Liking and Reciprocity. Still, it’s a long relationship-building effort that might not be practical for most 401k educators.

The highest form of authority is called “Earned.” This is where the true power resides. People with Earned Authority can walk into a room, immediately turn heads, and instantly quiet the raucous down. People with Earned Authority never ask to speak, they’re asked to speak. This is the ultimate psychological tool to use when motivating 401k plan sponsors and participants to do what’s in their own best interests. What exactly is Earned Authority, what are some examples, and how does one attain it? Those questions are answered here: “How to Walk into a Room and Turn 401k Heads.”

Some have blamed speakers for ineffective 401k education programs. They say the content is filled with too much jargon, the presentation is too boring, or the subject matter simply too dry. Others place the blame squarely on plan sponsors and employees. They say these participants are either apathetic or too busy. At least one study suggests it’s neither of these, but that it lies solely with the lack of trust in the service providers. No matter which is true, all these hurdles can be surmounted by the use of proven psychological tools. It is possible to persuade and motivate 401k plan sponsors and participants to save early, save more, and invest correctly. Even if they don’t trust a word you’re saying.

If you’d like to discover other important topics confronting 401k fiduciaries, then you’re invited to explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. His forthcoming book Hey! What’s My Number? – The One Thing Every Retirement Investor Wants and Needs to Know! will be available later this year.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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