A marketing technique called framing is being looked at with suspicion even thought it often produces a positive result — getting people to save for retirement.
"How decisions are made are very much influenced by how the decision is framed," said Julie Agnew, assistant professor of finance and economics at The College of William and Mary's Mason School of Business in Williamsburg, Va.
Framing refers to offering investment choices in ways that make it likely that investors will choose certain outcomes.
The way retirement products are marketed is a crucial factor in determining whether people enroll in plans and buy annuities.
That was one of the findings presented at a March 20 conference in Washington on financial literacy and retirement sponsored by the Retirement Security Project in Washington.
A positive example of framing is automatic enrollment of workers in 401(k) plans unless they specifically choose not to be enrolled.
The technique increases the likelihood that workers will save for retirement.
Ms. Agnew noted that automatic enrollment has dramatically increased the number of people saving in the plans.
At the end of 2007, nearly 36% of more than 1,000 companies surveyed were using automatic enrollment features in their 401(k) plans, up from 24% at the end of 2006, according to Jessica Borrego, assistant project manager at the Profit Sharing/401k Council of America in Chicago. No data were available yet for 2008. Using automatic enrollment was made easier for companies under The Pension Protection Act of 2006.
The way advisers explain annuities can also be called framing. By emphasizing the losses in the stock market, the salesman can make the argument that annuities are more favorable, and for many investors that is true.
Some advisers, however, ex-pressed concern that framing can mislead investors.
Many consumers are at high risk of being targeted by unscrupulous salesmen who are good at framing, said Sheryl Garrett, a certified financial planner and founder of The Garrett Planning Network Inc. of Shawnee Mission, Kan., a network of about 300 fee-only advisers.
"The very wonderful, productive salespeople out there ... are taking advantage of those who are most vulnerable in our society," she said. "It's the salespeople who've been really successful about this so far. We need to come from the other direction and help people be able to frame it in a way that is in their best interest," Ms. Garrett said.
But in referring to the problems associates with framing, Joel Ticknor, chairman of Reston, Va.-based Ticknor Atherton & Associates, said: "It really puts a higher responsibility on advisers and plan sponsors to present their material, or frame it, in a way that the advisers or the sponsors believe is in the best interest of the client." Mr. Ticknor's firm manages about $80 million.
"When markets are good, you can't convince clients that they should hold back and be more conservative because they're so worried about missing the next great moment. When markets are lousy, it's difficult to get across the message that the potential prospective returns are higher when markets are depressed," Mr. Ticknor said.
"You really want to present the choices in terms of realistic choices."
But not everybody agrees that framing is harmful to investors.
Robert Mansuetto, a financial adviser in the Paramus, N.J., office of The Prudential Insurance Company of America of Newark, N.J., said that much of the concern about salespeople's framing products that go against the interests of investors is misplaced. While many academicians mistrust salespeople, most salespeople "tend to believe that the products that they have are better in many cases," he said. Mr. Mansuetto manages about $15 million.
"I'm constantly looking for the perfect product for clients," he said. "There is no such thing. The product that is the best product for Client A this week may not be the best product next week," Mr. Mansuetto said.
Ms Agnew did note that framing can be effective in helping people make good or bad choices.
Regulators need to look at how marketing is being done for particular products, and information about investment choices needs to be standardized, much like nutritional labels on food products, she suggested.
"People are bombarded every day with by things that you might think were necessarily solely in the employees' best interest," said David Certner, legislative counsel and director of legislative policy, government relations and advocacy for the AARP of Washington, which represents 40 million members 50 and older.
"They're subject to aggressive sales tactics. They're subject also to advisers who may have conflicts of interest. These people are also doing framing," Mr. Certner said. "It's a pretty dangerous marketplace out there for consumers."
Mr. Certner is also concerned that framing can potentially lower investors' financial-literacy IQ.
"The more we focus on plan design and doing thing automatically in some ways suggests that we do less in terms of financial literacy and education," he said.
E-mail Sara Hansard at [email protected].
