The Crisis of Trust in Retirement Savings

NARPP has recently released new findings from two large-scale nationally representative surveys highlighting the pivotal role of trust in retirement savings decisions. The first study examines how trust influences plan participants’ savings choices. The second investigates how trust impacts plan sponsors’ decisions about which recordkeepers to choose for their employees. Both studies underscore that understanding how trust operates in the retirement savings setting is essential for understanding how plan holders and plan sponsors make retirement savings decisions.

With regard to plan sponsors, the NARPP study has two particularly noteworthy findings. First, despite plan sponsors’ low levels of generalized trust and confidence in financial institutions, they have a great deal of trust in their chosen recordkeeper. In short, plan sponsors must overcome low levels of baseline trust in financial institutions when selecting a recordkeeper.

As a social scientist studying trust, this finding is not all that surprising. In fact, the NARPP study was designed with just this discrepancy in mind. We often observe higher levels of interpersonal trust, that is, trust in people we deal with personally, compared to what is sometimes called generalized trust, or a measure of confidence in the relevant institutions. For example, we know that Americans have higher levels of trust in their particular doctor than they do in the medical profession as a whole.

NARPP wanted to determine whether this paradox — of low levels of generalized trust in financial service companies but potentially higher levels of trust in individual recordkeepers — holds in the retirement savings setting as well. Answering this question is especially relevant today, as levels of trust and confidence in financial institutions are at historic lows. NARPP wanted to know whether those low levels of generalized trust are having an impact of plan sponsors’ relationships with their recordkeepers.

To this end, NARPP asked plan sponsors questions about their level of trust in banks and financial services companies generally as well as separate questions about their level of trust in their particular recordkeeper. But they didn’t stop there. The NARPP study also asked plan sponsors a battery of specific questions about components of the plan sponsor-recordkeeper relationship: whether the plan sponsor has had a bad experience with their recordkeeper and whether their recordkeeper understands their needs, values their business, follows through on requests, and lives up to their promises. These questions help to ensure that the study captured the key components of how trust is built in the recordkeeper-plan sponsor relationship. The results were striking.

Plan sponsors’ levels of trust in their recordkeepers varied widely across recordkeepers. For example, while 93% of plan sponsors have a great deal of confidence in T. Rowe Price, only 53% of plan sponsors have a great deal of confidence in Mass Mutual. Although recordkeepers may deliver similar products, they aren’t delivering similar customer experiences. Recordkeepers that engender trust and loyalty will likely pull away from the pack.

Turning to NARPP’s participant study, trust again plays a large role in savings decisions. In their study of over 5,000 participants who are actively contributing to their 401(k)’s, they find that participants have exceedingly low levels of trust in their particular recordkeepers, lower than their own plan sponsors. While only 26% of plan participants feel they can always trust their respective recordkeeper to do what is right, 65% of plan sponsors felt they could trust their recordkeepers.

This may be because plan sponsors have more frequent and direct interaction with recordkeepers. Participants receive information and advertising from recordkeepers through less personal means of communication such as mail and email, while the plan sponsor may have a direct line of communication with an agent at the recordkeeper. Regardless, these low levels of trust are affecting plan participants saving behavior and this is concerning for the future of retirement in this country because we know that individuals with low levels of trust invest at lower rates and drop out of automatic enrollment plans at higher rates. Indeed, the NARPP study finds something similar: participants with lower levels of trust in their recordkeepers are less likely to calculate how much they need to save for retirement and less likely to reach out to their recordkeepers annually for assistance and information.

There is one additional point about the participant study that is worth mentioning. The NARPP study is actually a conservative test of the role of trust in savings behavior! By virtue of studying active plan participants, the NARPP survey is likely missing the employees with the lowest levels of trust and confidence in financial institutions and recordkeepers. This is because those with the lowest levels of trust are the least likely to participate in their plan sponsors’ retirement plans.

Finally, it’s worth reiterating the key question with regard to the relationship between plan participant and plan sponsor trust in recordkeepers and retirement savings: do low levels of trust translate into low savings rates and low employee plan participation rates? The short answer: yes. Although we don’t yet know what the total impact of this crisis of trust will be on retirement savings, we do know that we need to start thinking about ways to increase trust now, before it is too late.