Lack of Trust In Financial Institutions Has Reached Crisis Levels — For All Of Us.

My organization, The National Association of Retirement Plan Participants, spends much of its time analyzing the retirement savings industry. We look for ways to improve and simplify the process of retirement savings for the millions of working Americans who are relying on this system for financial security.

This week we released the findings from our annual investor behavior study. The headline is: “Trust in financial institutions has dropped to an all-new low of just 8%”. This further erosion of trust is deeply troubling and my question is — how long are we going to go on like this?

Declining trust isn’t just a headline, this drop reflects a real crisis in the lives of millions of Americans who are working hard and saving for retirement.

Trust in financial institutions is directly linked to one’s self-confidence in — and ability to — make long-term financial decisions, like saving for retirement.

Every aspect of saving for retirement requires “trust-dependent” decision-making, including deciding when to save, how much to save, where to save, and how to make your savings last throughout your entire life.

To really understand declining trust you have to first understand the mindset of savers and how they view their lives. Current research shows that the average working American is feeling financially unwell.

People are feeling stressed about their finances and their financial futures.

They know they need to save for retirement but the financial marketplace has become more complex and sophisticated and people have little confidence in their own ability to navigate this system.

In our study, on every self-assessment question about financial knowledge we see significant drops. This includes a 15 point drop in general financial knowledge on investing and saving, confidence in financial decision-making, and comfort in retirement planning.

Now consider what we are asking people to do — which is essentially become their own pension manager.

In practical terms this means everyone has to figure out how to start, fund, and manage a savings plan that will sustain them through their old age. This is a Herculean task even in the best of circumstances.

But we are not in the best of circumstances.

On a regular basis, people are confronted with news stories about financial firms engaging in misconduct, self-dealing and collapse.

The financial crisis is not a distant memory, most working Americans have not benefited from the recovering economy. Throw into this mix the heated Presidential election and what you are left with is dangerously low levels of trust.

The Consequences of Low Trust

The current low-trust environment is a problem for everyone — the entire retirement savings ecosystem. Employers who offer retirement savings plans struggle to increase employee engagement with their retirement plans and financial wellness programs.

Plan providers look to auto features and other default options to improve engagement and in doing so they become more of an unknown and untrusted stranger to investors.

But the group that will feel the impact of the low-trust environment the most are the people the system was designed to help — the millions of people saving for retirement.

Here is what happens as a result of low trust: low engagement. The two factors of trust and engagement are deeply intertwined. Trust is required for engagement, and engagement helps build trust. Our research shows there is clear link between engagement and savings rates as well as improved financial decision-making.

The Challenge: Building Trust

I would like to challenge my colleagues and friends in the retirement savings industry to take on the endeavor of building trust. This is something that we are working on everyday at NARPP, but we can’t go it alone. Real change requires all stakeholders to collaborate.

As a starting point — I would like to share with you some of the main causes of low trust in the context of retirement savings and also provide some solutions for building trust.

1. The industry could agree to adopt more common language standards around savings products. People simply don’t understand the language of investing. Stop using jargon. When people don’t understand what is being said to them, trust plummets.

2. No one understands fees. Fee information should be more transparent and easy to understand. If fees are in small print and are hidden it creates a feelings of distrust. This single issue presents one of the biggest positive brand building opportunities in years. Who will go first?

3. Provide information to people that is in their best interest. This may seem obvious but the majority of participants do not feel that the information presented to them is in their best interest. Another tremendous brand building opportunity.

4. Talk to people like they are smart and deliver a positive message. We can’t scare people into better financial decision-making. A respectful, optimistic view of the future builds trust.

For skeptics, I am not suggesting that improving trust will solve all of the problems in retirement savings — many of the problems are simply out of our control.