Here are 10 tips based on the principles of behavioral finance for helping workers achieve a secure retirement, according to The International Foundation of Employee Benefit Plans:
No. 1—Stress what could be gained or lost
“You get on base, we win. You don’t, we lose. And I hate losing, Chavy. I hate it. I hate losing more than I even wanna win.”
So said Oakland A’s general manager Beane, played by Brad Pitt, in the movie Moneyball. It applies to most everyone, and Nobel Prize winner Kahneman was first to note the pain of a loss outweighs the euphoria of a gain.
A chief tenet of behavioral finance, therefore, is that people are loss-averse, IFEPB explains. People are highly motivated to avoid what they consider a loss. To spur people to take action regarding their retirement benefit, frame messages so individuals will clearly understand how they might “gain” by taking action or “lose” if they don’t take action.
No. 2—Point out what others are doing right
“When making choices, people tend to do what they think most other people are doing because they believe there is less chance they will make a wrong choice. They are also influenced by what they think is expected or socially acceptable. Using these social norms can help drive people to take specific action.”
No. 3—Use testimonials versus eye-popping statistics
People love anecdotes; in fact, “few people are motivated to act when they are given statistics that reflect our collective situation,” according to the foundation. It effectively argues that statistics about airline crashes are far less effective than firsthand survivor accounts, a point that’s tough to argue. Do the same when getting them to save.
No. 4—Encourage individuals to picture their retirement
Like Lindsey Vonn mentally “skiing the course” before a big race, “encourage workers to envision their future retirement—where they want to live, what they want to do, etc. Having a personal retirement picture helps people avoid temptations to spend today, which can derail their retirement.”
No. 5—Leverage competition
“Try challenging individuals to defer at least 10% of their annual salary for retirement,” IFEBP says. “Or have groups of workers compete to see who can save the largest portion of their income on average.”
Offer prizes like gift cards, a free lunch or vacation days to winners.
No.6—Use opt-out versus opt-in features
Two neighboring European countries have a vastly different percentage of their citizens registered to be organ donors simply because one is opt-in while the other is opt-out. It’s a lesson for retirement saving and plan participation.
“Autoenrollment and auto-escalation features in a defined contribution (DC) retirement plan combined with the use of a target-date fund default option have proven to be highly successful strategies for countering these behaviors.”
No. 7—Limit investment choices
A criticism of Medicare Part D when it was first passed was that there were simply too many choices, and people were overwhelmed. Colloquially known as a “paralysis of analysis,” people freeze when too many decisions must be made. The solution? Limit the number of options.
“The unintended consequence of a large number of choices is choice avoidance—another way to describe participant inertia and procrastination. A consensus is growing among experts that the appropriate number of funds in the investment menu for a DC plan is between five and ten.”
No. 8—Structure the menu of investment choice
We recently wrote about alphabeticity bias, or the tendency for funds listed first alphabetically in an investment menu to receive more assets. It’s something of which to be aware.
“When people are provided a list of choices, they tend to choose the first choice they are given,” IFEBP write. “If the list is very long, another behavior kicks in—choosing the last items because these are the items that stick in their minds. Consider the implications of these behaviors when a list of investment choices is ordered from least to most risky.”
No. 9—Use a stretch match
But use it wisely.
“Offer 50% on amounts up to 6%, which yields total savings of 9%,” IFEBP recommends. “Alternatively, offer a 50% match on amounts up to 10% to encourage a total savings of 15%. Both of these stretch matches are good starting points until a worker looks more closely into his or her retirement needs with a financial calculator or advisor.”
No. 10—Provide access to a financial advisor
One-on-one advice still rules, something more plan sponsors recognize and are now offering.
“DC plan participants who have received advice from an independent professional save more, have more diversified portfolios and stay on course even when they feel vulnerable in market downturns,” the foundation concludes. “To encourage the use of a financial advisor, some sponsors arrange for a free or low-cost advisor to come to the workplace and allow individuals to meet with this professional during paid work hours.”