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October 24, 2016 at 03:00 AM
Surveys abound about Americans’ woefully inadequate retirement savings.
Related: For retirement security, save early and often [infographic]
The reasons for the discrepency between what workers save and what they need to live comfortably in retirement include:
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- Low plan enrollment;
- Inadequate plan contribution rates and portfolio allocations; and
- A lack of active engagement by employers in helping to put workers on the right track.
On the last count, there’s much that can be done. One industry player, Voya Financial, is investing in a major initiative — the launch of the Voya Behavioral Finance Institute for Innovation — to bring about needed changes.
This was the focus of a recent media briefing at the Museum of Modern Art in New York City. The new institute seeks to improve retirement outcomes by examining how individuals make financial planning decisions. Heading up the institute as “senior academic advisor” is Shlomo Benartzi (pictured below), an Israeli native, professor and co-chair of the Behavioral Decision-Making Group at the UCLA Anderson School of Management.
Benartzi co-founded the Behavioral Finance Forum, a collective of 40 prominent academics and 40 major financial institutions worldwide. The Forum helps consumers make better financial decisions by fostering collaborative research efforts between academics and industry leaders.
At Voya, other leading academics on behavioral finance will be assisting Benartzi, including John Payne of the Duke University’s Fuqua School of Business. Rick Mason, a senior advisor at Voya Financial, is coordinating research initiatives for the the company.
The institute’s mission is sweeping: to learn how retirement savers can achieve better outcomes in respect to savings rates, participation in workplace plans, portfolio diversification and building an adequate nest egg. Also a top goal: encouraging workers to keep their savings invested in an employer-sponsored retirement plan, rather than cashing out after changing jobs.
The institute’s claim to fame is this: It will not only conduct behavioral finance research, but also test new concepts in the field. To that end, the institute will collaborate with Voya’s employer clients and distributors.
“We want to be the place where academics come to us to test their ideas,” said Benartzi at the media briefing. “If you have a good idea, and you need to validate it, we can do so quickly to learn what moves the needle on improving retirement savings outcomes.”
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The Voya Behavioral Finance Institute for Innovation will not only conduct behavioral finance research, it also will test new concepts in the field. (Photo: iStock)
Initial findings
The Voya Behavioral Finance Institute for Innovation hit the ground running. At the Oct. 18 media briefing, Benartzi unveiled a new white paper he authored entitled, “Using decision styles to improve financial outcomes: Why every plan needs a retirement check-up.”
The paper examines how an understanding of individuals’ two primary decision-making styles — instinctive and reflective — can be used to uncover the “health” of a retirement plan and help participants more effectively achieve financial objectives for their golden years.
Related: Options are the future of retirement planning
There’s much to improve. According to Benartzi, about 9 in 10 plans are “not on a successful path.” One reason: Plan participants fail to engage in a “thoughtful decision-making process” about, for example, how much to contribute to a 401(k) and where to invest to achieve an optimal risk-adjusted return on plan contributions.
More to the point: There’s a lack of engagement after participants kick-start their contributions. A Columbia University report cited by Benartzi observes that nearly 3 in 4 (72.8 percent) participants haven’t changed their asset allocations in more than a decade.
How can plan sponsors and advisors help participants better reflect on retirement savings decisions?
Related: 32 goals for insurance advisors in 2016
Bernartzi suggested that employers start with a detailed analysis of participants’ interactions on plan sites. One area to explore: How much time they dedicated to the plan site, as opposed to multi-tasking on social networks like Facebook and Twitter. More quality time spent on the plan site would indicate a more “informed and reflective” decision on the part of the plan participant.
Other areas to investigate might point to more reflective (as opposed to instinctive) savings decisions. Among them:
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- Whether participants scroll through text and clicked to learn more about how retirement goals were calculated;
- Whether users plugged in varying contribution rates and retirement start dates to determine the impact on projected income, accumulated savings and trade-offs as to current versus future income.
- Whether they reevaluated an earlier plan contribution decision so as to achieve a better retirement outcome.
These aren’t idle questions. As Benartzi noted at the briefing, plan participants who rely more on their instincts are “far more likely to require significant course corrections” (i.e., changes to the retirement plan).
The core of Benartzi’s paper outlines his “Reflection Index,” a scorecard for measuring (in the aggregate) plan participants’ decision-making style about retirement that factors in three indicators: attention, information gathering and making trade-offs. The higher the plan-wide index score, the better the retirement outcome.
Thus, plans receiving an index score of zero achieve on average an income replacement ratio (gross earnings after retirement divided by gross earnings before retirement) of 56 percent. This compares with a significantly higher ratio (68.4 percent) for those with an reflection index of 3.
