A keystone behavior is one that positively influences other behaviors and generates collateral benefits. For retirement plan advisers who want to positively impact the success of their plan clients and participants, this means focusing on raising plan fee awareness.
A recent
study by The Pew Charitable Trusts suggests higher fee awareness correlates with certain worker attributes and some positive participant behaviors. The results show that familiarity with fees correlates with both greater confidence in their ability to make the right investment choices and higher rates of having prepared formal retirement plans.
The report posits that fee awareness, confidence and active retirement planning are attributes that contribute to workers' ability and propensity to accumulate savings needed for retirement. These assumptions are intuitively reasonable and backed in the report by references to outside research.
The report also shows that fee familiarity is positively correlated with age, income and education. With respect to age, the survey shows workers closer to retirement report more familiarity with their fees than younger workers. But the report also notes that the benefits of cost-consciousness compound over time; therefore, it would disproportionately benefit those who become fee-aware early in their careers.
Age, income and education are likely to be correlated with fee familiarity and plan participation; the same can be said for the interactions of these factors with investor confidence, retirement planning activities and overall financial literacy.
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Correlation doesn't directly equate to causation; thus, it is difficult to reach actionable conclusions. My own take is that cost-consciousness is likely to be a keystone behavior commonly associated with better investment decision-making.
Someone who delves into the intricacies of fee disclosures is probably a person who thinks more deeply about their investments and financial planning than the average retirement plan participant. This proclivity for self-exploration results in the development of a certain level of financial literacy and ability to apply what they learn to their own decision-making. It may be true, as Benjamin Franklin famously said, that "an investment in knowledge pays the best interest."
However, even if cost-consciousness is a keystone habit, it is one that is rarely practiced or even recognized. Shockingly few retirement plan participants know much about investment fees or even read fee disclosures.
Cost-consciousness may be a particularly difficult habit to establish because (1) fee disclosures are notoriously unappealing to read, (2) the plan sponsor generally determines the plan's investment menu, leaving little control over fees in the hands of participants, and (3) no one involved — the plan, the adviser or participants — are particularly well-served by a singular focus on fees relative to other retirement planning and investment behaviors.
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There are a few takeaways for retirement advisers.
First, it is imprudent to waste money. Cost-consciousness is a keystone habit for better decision-making by investors and is a legal obligation for retirement plan fiduciaries.
Second, information is not knowledge. Disclosures are necessary but not sufficient to promote better decision-making. Information provided to investors should focus on that which is material to decision-making and is sufficiently accessible to be easily used for that purpose.
Third, and most importantly, retirement advisers can play a key role in helping clients achieve positive retirement outcomes for employees. Working with plan sponsors, advisers can address cost containment structurally by optimizing plan features and providing thorough service-provider due diligence. Working with individual participants, advisers can help clients routinely apply best practices (i.e., form keystone habits) for contributing to, managing investments in and taking distributions from their plan.
Blaine F. Aikin is executive chairman of fi360 Inc.
