Behavioral finance “nudges”

Here are 7 behavioral finance suggestions out of a list of 10 from the International Foundation of Employee Benefit Plans that plan sponsors might want to consider.

These "nudges" might help overcome poor or illogical decisions on the part of participants and spur them to greater retirement savings levels.

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7. Use examples, not statistics.

Telling a participant that “experts warn 1 out of 3 could face poverty in retirement” is not as effective a way to warn of possible low-saving consequences.

It is more effective iif participants learn the story of one individual who is experiencing that poverty because of a lack of savings.

Touching the emotions, rather than the analytical mind, is far more effective in spurring a change in behavior.

6. Use a stretch match.

Pushing employees to save more by reconstructing your retirement savings plan match.

This could compel employees to save more to get it all, resulting in higher savings levels.

For instance, offering a 100 percent match on 3 percent contributions will only result in 6 percent savings — but offering a 50 percent match on up to 6 percent of employee pay will result in a savings level of 9 percent.

And a 50 percent match on amounts up to 10 percent will spur a 15 percent contribution level.

5. Cut down on investment choices.

Too many choices can result in participants choosing nothing at all, since people can be overwhelmed when faced with too many options.

Alternatively, they might split their contributions among all choices, which—if too many aggressive options are available—could result in their selecting unsuitable investment vehicles.

4. Pay attention to the choice menu.

Don’t top-load the menu of investment choices with either the most conservative or most aggressive options, since people often opt for the first choice when faced with a list of possible investments.

That could put people into the wrong type of investments for their needs.

Instead, perhaps consider leading off with a “basket of funds,” such as a target-date fund or balanced fund, that can be beneficial for a majority of participants.


3. Get employees to visualize what retirement will be like.

Making participants think about where they’d like to retire, which activities they’d like to indulge in during retirement and what their health might be like can get them to think beyond a short-term payout.

Such a payout could end up being spent way before the end of retirement. But visualizing retirement might help participants to consider ways to make money last longer and preserve investment options to allow funds to continue to grow.

2. Make them opt out instead of opting in.

Inertia is a very powerful force, and if people have to actively choose to join a retirement plan or to select a certain level of contribution they may just not bother.

If instead they have to choose to bail on a plan, or dial down a contribution percentage, they may just not bother with that, either, resulting in higher participation rates and higher contribution rates as well.

In addition, using auto-escalation can keep them adding more to their accounts just because they haven’t gotten around to reducing their contributions.

1. Start a competition.

Convincing employees to see whether they can out-contribute each other—or whether if they reach a certain percentage they can qualify for a prize of some sort—can stimulate better savings behavior.

Even getting groups together within the company to see whether all members can hit a certain level, say, 10 percent, can spur competition and achieve better participation results and higher savings rates.

(Related: Why So Many NFL and NBA Players Go Broke )

As efforts gear up to urge Americans to save more during America Saves Week (February 25–March 2), the news on the savings front is pretty grim. According to the Consumer Federation of America, U.S. Bureau of Labor Statistics data indicate that the American personal savings rate is at its lowest level since the U.S. financial crisis in 2008, at 6.0 percent of disposable income—and in fact is “continuing a 60-year downward trend line.”

That’s not good news for plan sponsors trying to find ways to encourage employees to save, and save more, for retirement.

But sponsors may not have considered turning to behavioral finance for some techniques that might provide a boost to more conventional tactics.

In fact, behavioral finance can help to overcome what probably seem like illogical tendencies on the part of plan participants not to save, or save enough, in their plans—or to make poor investment choices if they do participate.

During last year’s research forum held by the TIAA Institute and the Pension Research Council/Boettner Center at Wharton School of the University of Pennsylvania that focused on retirement security, researchers provided insights on retirement plan design, financial literacy and other topics designed to increase financial well-being for U.S. workers and employers — and among those topics were some that dealt with behavioral finance and the odd factors that can influence savers one way or another when it comes to putting away cash for retirement.

Among the behaviors noted in some of the research: probability weighting (when people overweight small probabilities and underweight large ones, which can lead them, if they overweight extreme events, to underdiversification and a demand for “lottery stocks”) and opting for immediate smaller payouts rather than waiting for a larger but delayed payout.

Each of these, as well as other choices made by investors, can cost savers and threaten their retirement preparedness.

Behavioral finance provides more “nudges” than “pushes”—and they can be subtle or blatant. Here are 7 of the 10 behavioral finance suggestions the International Foundation of Employee Benefit Plans lists, that plan sponsors might want to consider as they seek ways to overcome poor or illogical decisions on the part of participants and spur them to greater retirement savings levels.

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