The “Trustonomics” of Retirement Savings

In the 21st century, post financial crisis world we now live in, trust has become perhaps the most important factor in retirement savings.

Trust is the bedrock of every brand and financial institutions are currently experiencing a massive trust deficit. Professors from Stanford University have been studying the issue of trust for years, and their research finds that consumer trust in financial institutions is at an all time low, 11%. This lack of trust isn’t just a headline; it has real world consequences. Lack of trust in financial institutions impacts consumer financial decision-making in sub-optimal ways. But consumer trust is only part of the story. In a recent NARPP nationwide study of employers that offer retirement savings plans, this same measurement of trust drops even lower to a staggering 9%. These low trust dynamics have a direct impact on the retirement savings industry. Like it or not, we have entered a new world.

Today’s consumers and employers are skeptical, hyper-aware, savvy, and everyone competes for their attention. Information and data are ubiquitous: reviews, preferences and peer-reviewed choices are readily available. Social media is the great information equalizer, leaving advertising ineffective at best. In this world, customers’ loyalty is the new form of advertising, and trust is the fuel of loyalty. NARPP’s recent studies show that low levels of trust translates into decreased loyalty. Apparently, trust is the antidote to inertia. Studies show that employers are now more likely to consider changing service providers than ever before. This presents an enormous opportunity for service providers to differentiate themselves on the issues of trust, confidence and the variables that create them.

In a commoditized-industry, little edge can be gained by claiming to have better systems, education, statements, websites, investments, etc. If and when competitive advantages are gained at the product level, competitors are quick to copy them, and any advantages soon disappear. What’s more, from the employers’ point of view, trustworthiness is the most important factor when selecting a service provider partner. Second, is how customer service is provided to their employees.

As employees become more engaged with their choices, it puts pressure on employers to provide retirement plans that successfully engage employees to participate and to save. Employee trust in financial institutions impacts their retirement savings behavior. Essentially, the level of trust in their current service provider determines the extent to which an employee will engage with that provider in financial planning activities. Higher levels of trust also increases the likelihood that an employee will use the service provider for other products such as IRA’s.

If we look at what factors drive trust, we see that accountability is at the top of the list by a long shot. Employers expect and (should demand) that providers follow through on their promises. Current studies reveal that fewer than half of employers (45%) feel that their current service provider is accountable when following through with promises.

For financial services companies to successfully navigate the transition into the 21st century of “Trustonomics,” they must be able to: understand and manage performance metrics; listen to employers and employees needs (they are the same), and stay true to their promises. In doing so, they will be able to capture new clients and retain existing clients with higher levels of loyalty.

But that is not the most important part.

The most important part, is that by engendering higher levels of trust, people save more. And this is good for employees, employers, service providers, and the country.

Welcome to the future.