Professor Shlomo Benartzi, business school professor at the University of California, Los Angeles (UCLA), Anderson School of Management, and senior academic adviser at the Voya Behavioral Finance Institute for Innovation, told attendees of the 2017 PLANADVISER National Conference (PANC), Friday, that behavioral economics has the potential to markedly improve plan participants’ retirement outcomes.
He reflected on the campaign detailed in his book “Save More Tomorrow.” Basically, he said, people want to save, but will say they have no money to do that today. The campaign asked employees to save more later—specifically, when they get an annual pay raise. At that time, they will start receiving more, but if that money goes right into savings, they will not miss it. “People forget,” Benartzi said. “So, the campaign’s idea was to combat inertia with automatic savings.”
According to Benartzi, it took two years to find a plan sponsor willing to try out the concept, and the results were convincing. Average participant savings with the “Save More Tomorrow” campaign went from 3.5% in 1998 at that employer to 13.6%% in 2002. The plan sponsor, along with its adviser, asked the lowest savers to increase their contribution by 3% each year up to 12%, and 80% of them signed up. Benartzi said almost all who did so remained in the retirement program, but nearly 20% stopped at 9.4%. However, not one participant dropped back to a lower saving rate, and those who continued in the program and retired did so having four times as much retirement income.
“The right behavioral insights, placed with automated solutions to make things easy, worked,” Benartzi observed.
Moving beyond Save More Tomorrow
According to Benartzi, it took about 20 years for the ideas from “Save More Tomorrow” to fully catch on—the industry needs greater speed and scale to get more savers to their retirement income goals.
He said technology is the tool. Attendees of his discussion received a copy of his new book, “The Smarter Screen: Surprising Ways to Influence and Improve Online Behavior.”
A study by the University of Colorado with people who received 24 hours of financial education found general education did not work, but “just-in-time” education did. Benartzi explained that new savers do not need education about missing compounding interest opportunities if they cash out their savings at a job change—that information won’t stay with them. However, people shown the financial dimensions of their lives—how much they make and how much they spend—made progress. The study found that people provided with a mobile app offering this personal finance information checked it every two days; many used it in the morning before they made daily purchases. Spending went down by 15.7%, he said.
According to Benartzi, researchers measured the return on investment (ROI) of different digital nudging campaigns—what was the increase in retirement contributions per $1 spent. Showing participants the tax incentive of saving in their defined contribution (DC) plan resulted in only an ROI of $1.24 in savings per $1 spent. “No one understands tax rates, so that was not a big incentive,” he said.
Showing participants the matching contributions they will receive had a better ROI of $5.59 in savings, and financial education generated an ROI of $14.58 in savings. However, a simple email nudge showing what amount a participant would accumulate over time or the amount they would get if they took action resulted in an ROI of $1,600.
Benartzi said digital displays are attractive to participants because they are anonymous and there is no judgment. People will answer questions differently on an anonymous digital display than in person.
He shared some tricks for using technology to nudge people to save more. For example, if people read fast, they fail to take in all the information. Using digital tricks to slow down reading speed, such as setting off the text with ugly fonts or shadows, will get people to understand and remember what they read.
In addition, people have visual biases. In one study, Benartzi said, people were asked which of three desserts they didn’t like. But when they were asked to choose from three desserts they were shown online, with their least favorite placed in the middle, people always chose that dessert. “Think about where you put savings rates participants can choose on the screen,” he told conference attendees.
He also pointed out that when people have to make a decision with pen and paper, they get more emotional and think about it more. But, with digital tools, they don’t think as much, so participants should be offered a one-click solution to enroll in the plan, but not to cash out.
Further, digital nudging can be personalized. Benartzi reflected on how Amazon guesses what people want to buy and will stock those items near a person’s house, so that when he does order them, he receives them faster. “This is the level of personalization we have to get to,” he said.
In terms of retirement plans, he predicts we will get to a place where people will not be automatically enrolled at the same savings rate, and some will be auto-enrolled at a higher rate. “There are lots of opportunities for personalization with big data,” Benartzi said.
He noted that, on a website that showed participants what they have and what they need and that suggested savings rates between 6% and 11%, the opt-out rates were nearly flat across all suggested savings rates. “It was a beautiful result. We got them to save more income quickly,” he said.
Benartzi concluded that, even though the “Save More Tomorrow” campaign took two decades to catch on, plan sponsors, advisers and providers can apply the digital nudge ideas right away to give participants a lift.