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Best Behavior

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Some folks hatch their best ideas while sitting at a desk, flossing their teeth or sipping joe at Starbucks. Not Shlomo Benartzi. His creativity is fueled by being in unfamiliar, exotic places like Africa on safari or the Maldives, lush tropical islands in the Indian Ocean.

“I like doing things my way. I don’t work well in a structured environment,” says Benartzi, a professor at the Anderson Graduate School of Management of the University of California at Los Angeles and co-chair of its Behavioral Decision-Making Group.

“His way” is just fine, so long as he keeps coming up with ideas as good as “Save More Tomorrow,” a program that uses behavioral economics to increase employee savings. An ever-increasing number of large 401(k) plan sponsors are making it available to employees, and features of the system have been incorporated in the Pension Protection Act of 2006.

A pioneering researcher, Benartzi is an authority on behavioral finance, a discipline he defines as “the human side of dealing with money.” It encompasses individual investors, corporate CEOs and the markets themselves. His special interest lies in employee retirement-planning decisions.

“With the potential for people to make mistakes with their finances, understanding their behavior is very important. It can have a direct effect on their retirement savings,” says Benartzi, 40, whose UCLA teaching focus is “Psychology and Personal Finance.”

One of the first researchers to apply behavioral economics concepts to help employees make better retirement-savings decisions, Benartzi has served on the Department of Labor’s ERISA Advisory Council and consulted to numerous private and public-sector organizations, including Barclay’s Global Investors, Fidelity Investments, TIAA-CREF and the U.K. Department of Work and Pensions.

He is co-founder of the Behavioral Finance Forum, a research-oriented collective of psychologists, consumer behavior experts, behavioral finance economists and worldwide financial institutions.

BeFi, which started in 2006 and was acquired last year by the Rand Corp., heads to Washington this month to present new ideas about consumer finance to government policy-makers.

“The biggest mistakes employees make in saving for retirement,” Benartzi says, “is, first of all, they don’t save — about a third of people who have access to employee-sponsored plans do not participate. Mistake No. 2: Those who do save, save too little. And when they invest, they often forget about diversification.”

Benartzi, a native of Israel who arrived in the United States at age 20, became interested in behavioral finance because “although everybody cared about their finances, I saw that we knew very little about how they deal with money. It just seemed the right, natural thing to focus on it,” says Benartzi, who is forming a company geared to consumers’ better understanding of financial-product fees and another venture to help women handle money matters.

“Shlomo is an innovator who thinks outside the box,” says BeFi co-founder Warren Cormier, president of Boston Research Group, a leading firm in retirement research. “He’s able to take in an enormous amount of information about what’s going on, and process and synthesize it to create new approaches to solving familiar problems.”

“Save More Tomorrow,” a.k.a. “SMarT,” applies, particularly, in today’s straitened circumstances. The program, originating from research that Benartzi conducted with University of Chicago professor Richard Thaler, encourages employees to make an advance commitment to allocate part of their future salary increases toward retirement savings. Financial institutions in the U.K. and Australia, among other countries, have adopted programs similar to “SMarT.”

“Asking people to save more now is tough; but, actually, these are the times when they should be saving more,” Benartzi says. Using “SMarT,” they can decide today that, “in a couple of years when things rebound and they get pay raises, they’ll save more. Now is the best time to get them to agree to that.”

With 401(k) plans, employees bear greater responsibility for retirement-savings decisions as opposed to defined benefit plans, where employers bear the risk. This is where FAs can play a major advisory role, Benartzi says.

They can also help clients realize the impact of “hidden fees” on finances and retirement. “People don’t pay enough attention to fees when choosing investments,” he says. “In the pay-out phase, fees can have a dramatic effect on retirement savings and can even cause consumers to outlive their funds.”

Further, nowadays advisors should be absolutely certain of who is backing up financial products available for pre- and current retirees, Benartzi says. “A lot of things we took for granted have gone through an earthquake. Who will your clients buy an annuity from? Large insurance companies? Well, [right now] it doesn’t look like they know how to handle risk!”

Born near Tel Aviv, he had no “grand plan” to carve out a career around finance, though, in 1989, he graduated with a B.A. in economics from Tel Aviv University. He went on to receive his Ph.D. at Cornell University. Before joining UCLA in 2002, Benartzi was an assistant professor at the University of Southern California.

And what behavior can we cite about this behavioral expert that has served him well? Topping the list: Never taking no for an answer. “I get a lot of things done because I don’t give up,” he says. “Once, I needed some data from a CEO for my research. It took nine re-scheduled phone calls — but on the ninth one, I got it!”

In wrapping his case for the importance of understanding behavior vis-?-vis finances, Benartzi stresses: “We saw that [ex-Federal Reserve chair] Alan Greenspan didn’t understand the behavioral aspect of CEOs: He didn’t understand that if people are given the opportunity to cheat, they will — and more than you think.”

Freelance writer Jane Wollman Rusoff is a Los Angeles-based contributing editor of Research and is the founder of Family Star Productions.