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Every time we experience volatility in the markets, some of your 401k plan participants decide to sell out of equities (locking in losses) because they get scared. Others know they need to increase their contribution rate to capture your maximum company match, but they never act. Why do participants do these things? Justin Goldstein recently wrote about the behavioral finance concepts which underpin these actions.

I have taken these concepts and added my thoughts on how you can help your 401k participants overcome these destructive behaviors. Consider adding the following to your next 401k education session:

401k Education Opportunities


We like to anchor the logic we use in making a decision to some facts we believe to be true. If we wonder about whether we are making the right decision, we often seek reassurance that our facts and logic are valid, rather than seeking and accepting facts that might challenge our ideas and conclusions. The result is that sometimes we are too stubborn to admit that we have used the wrong facts to generate a conclusion.

In my discussions with plan participants, I have seen anchoring show up in many forms. Participants have said to me since I started in this business, more than 30 years ago, that Social Security won’t be around when it is time for them to collect, they won’t live long enough to retire, they plan on working in retirement and don’t have to save now, etc.

Solution: The best way to combat anchoring problems is with a good 401k education program. Make your annual 401k education sessions mandatory. Consider offering online education that requires employees to complete modules by a specific date.

Gambler’s fallacy

Some of your plan participants enjoy trading their 401k accounts. They believe they can market-time their buys and sells to take advantage of market fluctuations. Unfortunately, these participants normally trade their 401k accounts down to nothing.

Solution: Require these individuals to meet with the investment advisor that works with your plan. You can identify who they are by looking at the website reports that your recordkeeper produces. They will be the individuals who are not close to retirement who check their balances every day and make frequent trades.

Herd behavior

We tend to take comfort in doing what everyone else is doing, especially during emotionally charged times. We rationalize that everyone else can’t be wrong and if things turn out badly, oh well, we will have plenty company to be miserable with. As a result, we sell out of equities when markets fall and over-allocate our account balances to equities when the stock market soars.

Solution: Plan participants should stick to their savings and investment plans and manage their emotions effectively regardless of whether the markets rise or fall. Make sure that your investment advisor’s contact information is widely distributed and available to participants. Encourage participants in your 401k education sessions to call your advisor before making any significant changes to their savings and investment plans.


Your plan participants are busy with their lives. Therefore it is easier for them to do nothing rather than something. Inertia impacts plan participants when they don’t increase their contribution percentages to capture your full match or when they fail to enroll in your plan.

Solution: Add automatic enrollment and auto contribution escalation features to your 401k plan. The data is there showing that auto features work.

Loss aversion

Studies have shown that the pain of loss is twice the pleasure of gain. We expect the value of our 401k accounts to always increase and are surprised when we lose money instead. Loss aversion is the main reason why most participants end up being bad investors. When the markets fall they get scared and sell.

Solution: Similar to what was shared above, it is important for participants to stick to their savings and investment plans. Make sure your 401k education sessions feature discussion of these topics and also encourage participants to call the investment advisor that works with your plan before selling during market downturns.

Mental accounting

Many of us divide up our financial worlds and create constructs that make sense to us but are really not all that logical. We may attach different meanings and rules to retirement savings, personal savings, vacation savings, etc. For example, we may decide not to contribute the amount required to receive the maximum company match because we are saving to buy a new car. Giving up free money from an employer is something I see employees doing all the time. They don’t accept that the very best, safest, and highest returning investment they can make is accepting 100% of that free company match.

Solution: Many employers have decided to offer financial wellness education and have been merging it with their 401k education. Consider offering both at your firm. Also, consider running a report from your recordkeeper’s website that shows which participants in your plan are not receiving the maximum company match. Send out an email to these individuals making them aware of their shortfall and give the report to your investment advisor and ask him to talk to these people.


Focusing too much on the present rather than the future is something we all are guilty of. It is hard for some participants to get excited about retirement when it is 30 or 40 years away. As a result, they don’t save enough in their 401k plans.

Solution: Nearly every recordkeeper produces quarterly statements that highlight participants “gaps” — the difference between what they will need to retire and what they are on track to save. Be sure that you are electing to have this gap analysis displayed on your quarterly statements. If you aren’t working with a recordkeeper that provides this analysis, think about making a change to one that does.

The next time you are putting together ideas for a 401k education session, make sure you talk about these behavioral finance concepts.


About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at: https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.