Behavioral Science is a Plan Sponsor’s Best Friend

Rather than working against participants’ avoidant tendencies, enhancing accessibility through mechanisms like automation, auto-enrollment, default elections, and enhanced active choice, sponsors can ensure that these behaviors are less of an obstacle to future savings.

The mad scientists in their not-so-evil laboratories have done it again: they’ve found out how to understand and even utilize human behavioral tendencies to help you with enrollment. Okay, maybe it wasn’t mad scientists, but there are truly lessons to be learned from behavioral science. Regardless of the reason why, employee reticence to actively engage with their benefits and retirement savings can seem puzzling, nonsensical, or even irritating to sponsors. But rather than working against participants’ avoidant tendencies, enhancing accessibility through mechanisms like automation, auto-enrollment, default elections, and enhanced active choice, sponsors can ensure that these behaviors are less of an obstacle to future savings.

One of the major reasons employees don’t engage with their healthcare, 401(k), or supplementary benefits is because it’s confusing and stressful—especially for those who have unreliable access to the internet, are first-timers, or whose first language is not the one in which plan documents are provided. Simplification can help make an overwhelming situation less stressful; the key here is to simplify whenever possible, and help users break down big, important choices into smaller, more manageable steps. Instead of seeing a mountain, participants are instead presented with several smaller decisions that in the end, add up to something great.

That said, it’s always good to have a backup plan, especially for such important decisions. Providing a default option can help those who face decision paralysis, forget deadlines, or for other reasons unintentionally self-sabotage or are simply unaware of the opportunities available to them. In addition, automating parts of the process can help lower the barrier to entry as well and make what may seem like a monumental task less daunting. Auto-enrollment is a great example; it helps employees begin their journey toward retirement savings even if they’re not paying close attention and is additionally highly popular. Younger workers especially will see the most significant results, and report being very satisfied, as this mechanism helped them begin saving for retirement before it even occurred to them as an important priority. Similarly, defaulting to higher than average default contributions is a way to subtly boost employee’s retirement savings. For some employees, they may need or value more cash on hand, and will manually decrease their contributions, but for everyone else, as the money isn’t even hitting their bank account before being redistributed, they’ll boost retirement savings without even feeling like they’re missing anything.

Speaking of opting out, enhanced active choice messaging is another helpful behavioral motivator, especially when auto-enrollment isn’t an option. Active choice is when there is no default decision and makers are presented with a choice, while enhanced active choice “favors one alternative by highlighting losses incumbent in the in the non-preferred alternative.”[1] To oversimplify, enhanced active choice presents a “good” and a “bad” option, and forces users to choose. It’s easier to implement than auto-enrollment and provides extremely positive results; by making participants either choose a savings amount or explicitly choosing a choice labeled “I don’t want to save for retirement,” or something similarly weighted to emphasize the negative fiscal implications of their choice, sponsors can help incentivize savings with minimal effort.  

It’s no surprise that employees of varying ages need different styles of communication. While older participants may prefer in-person learning, Gen Z and Millennials, for example, tend to prefer flexible, self-directed online communication. However, in terms of content rather than user engagement, employees across the board want the same thing regardless of age, level of financial literacy, or socioeconomic class: personalization. That can be hard, when you’re dealing with hundreds or thousands (or tens of thousands!) of employees, and sponsors aren’t advisors. At such a large scale, even advisors will run into difficulty providing personalized financial plans for that many people. In addition to actual financial advisors there are websites, apps, online dashboards created by banks and investment firms, and other tools available where users input demographic and financial information to receive a “custom” plan, which can be a good starting place. These, however, aren’t truly custom-built in the traditional sense of the word, though an individual’s personal information is used to create the plan using economic calculations, possibly in conjunction with behavioral economics. Financial planning is certainly not a one-size-fits-all or a some-sizes-fit-all scenario, though plan sponsors can certainly learn from this model. Creating informational resources based on demographics like age, goals (home ownership, educational savings, or even vacation plans), or even providing flow charts or quizzes that have employees input general information like age, desired retirement age, priorities, and current savings elections that then outputs suggestions can assist in orienting participants toward resources that may be beneficial to them.

These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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