How to Use Behavioral Science to Boost Retirement Engagement

How to Use Behavioral Science to Boost Retirement Engagement

Webinar Transcript:

Megan Yost: This webinar is on how to use behavioral science to boost retirement engagement. This webinar will be recorded and shared after the webinar. If you want to go back and listen to anything in detail, you’ll be able to. My name is Megan Yost, and I am an Engagement Strategist at Segal Benz. I am joined by Warren Cormier who is the Executive Director of DCIIA Retirement Research Center. DCIIA is an industry trade organization for the 403(b), 401(k) industry. It stands for the Defined Contribution Institutional Investment Association. Warren, do you want to say anything about who you are and your background?

Warren Cormier: Sure. Thanks. Thanks for saying what DCIIA stands for. I don’t have to look it up again. I’m Warren Cormier, and I have been working in behavioral economics for maybe 15 years now. I founded, with a professor at UCLA named Shlomo Benartzi, the Behavioral Finance Forum. Basically what we were doing is bringing people from the business sector together with academics to promote and advance behavioral economics, but primarily through how to help people make better decisions. That has been an integral part of my research and research design for years. That’s basically who I am.

Megan Yost: Great. Well, we’re excited to hear from your research the examples you’re going to share with us today. We’re going to focus primarily on the defined contribution space because there is such an interesting mix of employer or plan sponsor, plan design, and how participants, how employees, use the features of the plan, how they understand and save for investments, and how they invest their savings. We’re going to talk about the participant mindset and how that interacts with the retirement plan. We’re going to talk about innovations and steps plan sponsors have taken to make the plan more accessible and easier to navigate and understand. Then we’re going to really geek out and talk about nudging and how it works and why it works and how that applies to communications. Couple of housekeeping items before we get started as well. You can enter questions into the Q&A panel at the bottom of your screen, and we’ll address them as we go if we see them or we can address them at the end of the presentation, so don’t hold back.

Again, we’re recording this webinar so you can access it following the presentation. About Segal Benz, for those of you who don’t know us, we help great organizations inspire people to improve their lives, their health, their finances, and their future. We’re an employee benefits communications firm, but we’re part of a broader organization known as Segal that does consulting across a whole variety of disciplines, whether it’s retirement, investment consulting, health consulting, and more. All of us together are trying to help people improve their lives through the benefits that their plans offer. Let’s now dive into the presentation. As I’ve mentioned, first, we’re going to talk about barriers to engagement. With retirement planning in particular, there are so many things that get in our way in terms of helping us do what we should do in terms of saving enough and investing for the future. We’re going to spend the bulk of this presentation talking about behavioral and cognitive barriers. There’s also financial barriers around literacy. It’s really well documented in retirement planning that the language that is used often is not language that’s familiar to a lot of people, and this is consistent across the globe.

There was a study done by State Street Center for Applied Research many years ago that essentially asked people some questions and it scored them like they were be scored in an exam from an A to an F basis. Not surprisingly but kind of sadly, most people scored around a D, including Americans. This was consistent across all developed markets across the world. It’s something that is systemic. It’s not unique to the United States, but it is a significant headwind in retirement planning and defined contributions specifically. Additionally, you often have to engage with the math and crunching numbers, and that’s another thing that people want to avoid and don’t want to think about deeply. On top of that, there could be competing priorities both for your time in terms of your everyday life and making decisions and fitting those decisions into all the other things you’re trying to juggle between work and home and everything in between, but also competing priorities for your dollar in terms of if you have extra savings, and that’s an if.

If you have extra savings, where do you put that money in terms of building short-term savings or emergency savings or savings for the future? How do you juggle all of those competing needs that you have financially? Finally, two really big barriers to engagement to consider are trust. Trust plays a huge role in your money and how you’re willing to save your money and save it for the future and the institutions you’re willing to listen to in terms of advice or guidance for how to do so, and then fear of death and old age. One thing that most of us don’t like to think about is not only retirement but the later part of retirement. When you ask people questions about retirement, they generally give you pictures and think about that first part of retirement, early retirement, where they’re spending time with loved ones.

They’re doing the things that they’ve always wanted to spend time doing, whether it’s passion projects, travel, fill in all of those things that you visualize when you think about retirement. But they don’t like to think about the years that are beyond 80 or even 90 or even further into the future. Warren, do you want to talk about that or some of the research you’ve done around death and old age and picturing retirement?

Warren Cormier: Sure. By the way, just one note on trust in our research, and we develop basically causal models as to what causes engagement and what doesn’t. We found that trust is about four times more powerful as this trust in the people that are asking you to do things, like the employer is four times more powerful than even something as important as financial literacy. You can’t really dial up and down with financial literacy levels engagement, but trust actually is a much stronger lever. People tend to have a problem with anything to do with time. They have a hard time perceiving time and what its effects are. As you were saying, Megan, we did research that we call age laddering. We talk to people about their view of retirement. They tend to focus on the first 10 years of retirement, and that’s a happy time. That’s when you no longer have to go to work every day and you’re traveling or you think you will be. You still have a lot of your 401(k) balance available.

But when you go beyond 10 years, let’s say out after 70, 75, now the picture becomes very dark and people generally don’t want to think about that. Why is that important is because your money, your savings has to last probably longer than you were in the labor force. You’re not thinking that much further along. Your perceptions of solutions to how they’re going to get along become very vague. Again, these people are in their 50s, 60s that are telling us this, but they don’t know. And so we think about uncertainty, it just explodes after age 75. That’s a major barrier to engagement is you’re not really capturing or perceiving what retirement is going to be. It’s this retirement from your job, but then after 75, it’s kind of that’s a distant memory and you’re really now dealing what we call elderhood, which is I’m now in a fight or battle for surviving or for lasting my money.

Megan Yost: Right. Yeah. I think one of the biggest challenges with retirement specifically, especially compared to other benefits like your health plan decisions is that you don’t get feedback immediately. Like you use your health plan over the course of a year, so you might know like you feel like you’re getting the most from it or not on some level. But in retirement, you don’t get feedback on these choices that you’re making until much, much further in the future. And so that’s where some of the murkiness comes in with retirement planning. And so whenever there’s things that are uncertain where you’re not getting instant feedback or information about, it creates an environment that lends yourself to doing nothing, to delaying decisions because there doesn’t seem to be an immediate consequence to not doing something. You might make suboptimal choices because you’re trying to navigate complex information.

You’re doing the best you can with the limited information that you might have, and you might doubt the decisions or the choices that you make about decisions. Those are common reactions to anything that’s kind of murky and hard to navigate. A couple other things we just want to highlight before we talk more about the behavioral finance aspect of this is that money is a source of stress for most workers. PricewaterhouseCoopers does a financial wellness survey on an annual basis. This consistently shows us that money challenges are the biggest piece of stress that people feel in their lives above their job and relationships and health concerns and others. And so that takes away from when people are working and they’re stressed about finances at work. It can take away from their productivity and it can contribute to presenteeism and so forth.

Another element that we want to talk about just briefly is that COVID has had a huge impact on people’s lives throughout the last 18 months in a variety of ways. Obviously, retirement savings is one aspect of how people have been impacted. If you’ve been tracking a lot of the different research that’s been produced by a whole variety of firms, a lot of them are saying that by and large, Americans are weathering COVID financially pretty well and many Americans believe they’re on track. They say their retirement savings haven’t been terribly affected. What we want emphasis about these numbers that you might be seeing through the variety of research reports that are out there is that they only represent the people who have access to a retirement plan. So if you don’t have access to workplace savings plan, that it might not capture the full picture of how Americans are faring through the pandemic. Additionally, it might not take into account the 30 plus million Americans who may have been laid off or furloughed or were forced to take a COVID-related distribution during the many months that we’ve been part of this pandemic now.

Warren Cormier: Megan, can I add something here?

Megan Yost: Mm-hmm.

Warren Cormier: A silent victim of COVID has been just increased general anxiety among workers, financial anxiety with uncertainty about what’s going to happen with their job. Although as you mentioned, most people in a 401(k) or DC plan fared better than those that were not in a plan. There’s also a scarring effect that we’ve seen a lot of, we’ll call them adjustments. We’ve seen COVID. We’ve seen the housing crisis. We’ve seen stock market crashes. These things all have a cumulative effect on people’s stress about the future and also their willingness to take risks in the stock market. As a plan sponsor, you got an additional challenge just to get over, help people get past what’s happened in the recent past and start to make some good decisions.

Megan Yost: Yeah. Great points. We’re going to talk a little bit now about plan design and how plan sponsors have designed their retirement plans to help make saving easier and investing easier for participants. Some of this may be fairly basic to those listening today who are really familiar with plan design and retirement plans, but we wanted to make sure, start at a level playing field for everyone. We’re going to go through the basics and we’re going to build on this through the presentation. There are three areas that plan sponsors have been focused on. They’ve been trying to simplify the plan and the experience for employees. They’ve been trying to make it easier to navigate the options within the plan and the labels and how things are described. They’ve been trying to help make it easier to visualize the effects and the impact of decisions that you make during your tenure, in your involvement in participating in the plan.
I’m going to go through this fairly quickly. There’s a lot of literature and you can contact us after if you want more information about plan design trends. Generally speaking, since the Pension Protection Act in 2006 plans have been consolidating their record keepers, streamlining things, so the experience is easier for participants to navigate. Instead of five record keepers, there might be one or two, hopefully one. Similarly with plans, there could have been hundreds of funds at the outset of when the plan was first developed, but over time, they’ve been whittling it down to fewer to help curate funds, to make it easier for people to wade through the options that are presented. Plans have also used automatic features to make it easier to enroll in the plan. This includes adopting automatic enrollment. If you don’t make a choice, you don’t elect to participate in the plan.

Oftentimes your plan sponsor can do that for you. They can put you in a diversified investment like a do it for me type of investment like a target-date fund. Talking about automatic enrollment more specifically, Vanguard produces a report every year called How America Saves. In that, at the end of last year, 54% of their plans had adopted automatic enrollment. You can see it’s been steadily increasing over time since 2004. Of that, the majority of large plans with over a thousand participants have been using automatic enrollment. So it’s fairly common across the largest plans in the country. Additionally, many plans have been adopting the feature called automatic escalation where they steadily increase your savings rate over time. I want to turn it back to Warren to talk about this in a little bit more depth here in terms of why people are more willing to save more tomorrow as opposed to do so today. Warren, turn it over to you.

Warren Cormier: This is a concept in behavioral economics. It’s particularly relevant to retirement savings. When it comes to decision making, it’s complicated by the fact that your participants are making what we call intertemporal choices. That you’re making a choice today that will have consequences 45 years from now. These types of choices are no different from other choices, except that some consequences are delayed and must be reweighted to take into account that delay. Humans are said to discount the value of a later reward by a factor that increases with the length of the delay. In this study here, people were asked, they were at a business conference and they were asked to select their break time snack at the beginning of the session. When they were asked to pick what snack they wanted a week from now, 74% said, I’ll pick the healthy choice, the fruit signified here by a banana, and 26% picked the candy. That’s a week from now. But if you told them to pick your choice or make your choice for your snack today, 70%, exactly reversed, picked the candy today and only 30% picked the fruit today.

Decisions that prioritize short term gratification often neglect and detract from our long term wellbeing. That’s what’s happening here. We’re going to talk a little bit later about prospect theory, but the battle you have is that people need to see a very large future gain to offset, because they’re going to discount that gain almost back to zero. What they see is I just don’t have enough. I don’t have as much money to go bowling or have pizza or to see my friends or whatever, and this is a loss for me. People hate loss. That’s really one of the major barriers to people making good decisions about saving for retirement, because the more money they save, the more sense of loss they have.

Megan Yost: Yeah. We all are our best selves in the future, right? We’re all doing the best behavior in the future but not in the present.

Warren Cormier: Relevant in the future.

Megan Yost: Exactly.

Warren Cormier: We all look better. We all are in better physical condition, et cetera, in the future.

Megan Yost: Exactly. Another way to make choice easier to navigate is to use categorization, that is like use buckets and groupings to make it easier to wade through the choice so it’s not so overwhelming. You can whittle down or categorize or bucket information in a certain way. Plans have been doing that by tiering the investments within the fund menu. They use like a do it for me, do it with me, do it myself structure in many cases or something similar to that. Often within those tiers, they use descriptive or objective labels or white label. It’s not just about the fund name, which includes a lot of gobbledygook to most people, but what does the fund try to do? Is it seeking growth? Is it seeking to help you preserve savings? Is it seeking to provide you with income? Providing some of those descriptors helps people hone in onto what might be most relevant to them at different points in their career.

That’s one way that consultants can help plan sponsors, make the menu itself more easy to navigate. Then finally, this last piece, which is where we’re going to be spending the bulk of our presentation today is about making the consequences of choice more vivid in the present. To get at what Warren is talking about where making this tradeoff between a decision in the present versus the future and the impact in the future, if you can help people understand the consequences of action today, whether through techniques like enhanced active choice, framing, loss aversion, we’ll talk about all of those in more specifics. You can incorporate them into your communications. You can incorporate that into personalized statements, into personas or even social proof where you use other people and social pressure to show most people are doing this so it might be a good thing to follow the masses and also do what they’re doing. We’ll show examples of those to all of you. I’m going to turn it back to Warren now to talk about driving engagement through nudges and really elaborate on what nudges are and why people might need them.

Warren Cormier: Thanks, Megan. Why do we even need nudges? Well, because there’s all sorts of what we can probably consider cognitive errors that people make that get in the way of being more engaged. What are some of them? By the way, I could fill up 10 slides like this with cognitive barriers. We have status quo bias, people don’t like to leave the status quo, even if they can see that doing so would be helpful. Procrastination, doesn’t need a lot of explanation. People use heuristics or rules of thumb. Like don’t put all your eggs into one basket is a rule of thumb. Some of these heuristics can be helpful. Some of them can be harmful. There’s hurting. What’s everybody else doing? Choice overload. It’s interesting. When I look at the materials that are used for enrollment, we’re asking people to make maybe three, maybe four pretty complex decisions at one time. Each one has lots of dimensions. It creates choice overload. They just can’t continue.

That’s another reason why Megan’s simplification is so important to help ease that choice overload. Confirmation bias. We see that all the time. We tend to only listen to news channels that you agree with. You have your own bias and you’re looking for somebody to support that. Overconfidence, I’m going to talk more about that, but that’s probably one of those damaging barriers to engagement or barriers to making good decisions. Let’s go on from there and say, so what is a nudge? A nudge theory is about how we design choices for people. That design influences the decisions that we make. I’ll show you some real examples of that. There’s this enforced strategies and there’s nudging. What’s a good example of forced strategies? Well, the social security, contributions to social security. That was not something that you were nudged.

You were told that you didn’t even have a choice. Your employer took over your money and wouldn’t even give it to you. You didn’t have a choice what to do with it. As it says here, forcing methods are drastic, direct, and require conscious determined effort by the people being changed. Or if they can’t do that, then the employer steps in and says, okay, at the mandate of the government, we’re going to require that you do it. They’re confrontational and liable to provoke resistance. Now you only have to look on the first page of the newspaper today. You see, we have COVID mandates. That is not a nudge. That is a, in a sense, a two by four between the eyes. You can see the natural resistance we get from a lot of people who just don’t like being told what to do. Now, nudging is, and I said what’s a good example of a nudge is matching your 401(k) or your DC plan.

Nudges are easy for people to imagine doing, because you’re helping them understand how things are going to grow. They’re less threatening to people because it’s their choice. It’s not very disruptive to what they actually do or what they’re doing. They’re indirect, they’re tactical, less confrontational nudge. For example, a match in a 401(k). It’s not very confrontational. It’s just saying you have this option and we’ll give you money if you put money in. That’s proven to be just a huge boost to the marginal propensity to save for retirement in this country over the last, let’s say 40, 50 years. That’s the difference between what is enforced and what a nudge is. Moving on, why do they work? Well, we already talked about trust. Nudges leverage the three most powerful cognitive behavioral changing forces. What are they? Trust, we’ve talked about. It’s a prerequisite, by the way, to your making non-intuitive choices.

When you have trust, you make a choice that’s very non-intuitive, that is to allow a surgeon to work on you. That’s the least intuitive thing you will ever do. Someone’s going, you don’t even know that well who’s going to somehow open you up and do some things you don’t understand. Trust, that’s just an example of why trust is so important. There’s also loss aversion. When we remind people and regret aversion, they’re closely related. But we remind people of what the consequences are of your decision. Then both positive and negative. Oftentimes only the positive is mentioned and the negative is extremely important to help nudge work. We’ll get into that. That’s in the realm of what we call enhanced active choice. We’ll talk about that, but that’s why nudges work. If all those things are there, then a nudge is highly effective. Let’s move on from there.

Framing, how do nudges work? Nudges usually frame the decision differently. They give you a different choice architecture, which choice architecture simply describes how or the way decisions can be influenced by merely changing how the choices are presented. I’m going to show you a sample of a study. Also, nudges work because it asks people to do intuitive thinking versus calculative thinking. Calculative thinking is you see oftentimes in financial material, you’ll see two columns. If you do this percent, then you get this dollar amount. That’s calculative thinking versus intuitive thinking, which is what is appealing to the way you really think intuitively. We’ll get into that too. We’ll show you a fun example of that. The power framing. I’m going to show you this study, very quick study. This has to do with the number of lines on an investment selection form that affects the number of funds selected. You’re thinking, well, gee, I mean, that’s a pretty important decision. The number of lines on the form shouldn’t have that much impact, should it?

Morningstar.com, this was a study done by Richard Taylor, recent winner of the Nobel Prize, and Shlomo Benartzi is probably not far behind him with morningstar.com subscribers. What does that tell you about the response, the sample? That respondents was that they’re pretty savvy. They’re morningstar.com subscribers and they were presented with eight investment funds and were asked to construct a portfolio. One group was presented with an investment election form with eight lines. Another group was presented with an investment selection form or election form with four lines. Those selecting more than four funds was just a click away. Just click here. We’ll give you four more lines. This says, please indicate how you would allocate your retirement contributions. If you’d like to elect more than four funds, just please click here. That’s how the second group worked. Well, for the people who had eight lines on the form, that’s the blue bars. You can see the number of people or the percentage of people that went beyond four funds.

Roughly adding these up, it’s about 40% went over the four funds. But if you look at the people who were given four lines and simply click if you want more lines, only about 10% went beyond four. That’s what we mean by choice architecture and framing, is that simply asking the question in a different way or giving them a different response vehicle, you dramatically change the results. Keep that in mind as you’re presenting people with options and asking them to make decisions. That’s just one quick example of framing and choice architecture. Then there’s the calculative versus intuitive thinking. I talked before about calculative thinking is more this leads directly to this, this column leads to this column, and it’s very logical and sequential. I want to talk about intuitive thinking. I’m going to give you an example. This is a paragraph that people were given before as part of the experiment. The Stremnaya road is extremely beautiful with gorgeous mountains, cliffs and greenery.

While the road off has dramatic scenery, it’s considered by some the most dangerous road in the world. The combination of extremely narrow roads and tall cliffs could easily result in a deadly accident. An average of two vehicles per month fall from the road. The danger of the road ironically though has made it a popular tourist destination starting in the ‘90s. Mountain bike enthusiasts in particular have made it a favorite destination for downhill biking. Question. Would you be interested in taking an all expense paid trip to the Stremnaya road? Now, that’s calculative explanation of risk. One of the hardest things we have to do as plan sponsors, I’m a plan sponsor too, is to explain risk to people. This is a calculative way. The words go from left to right, from top to bottom, very, very linear. That’s the calculative way.

Now, let me show you the intuitive way of presenting risk. This is where you have the effective technique, which is you start to show them pictures of what the risk actually is. We can just go through there and keep going, Megan. You can see now you’re getting a very... Well, keep going. Keep going. You can see just how dangerous, by the way, this is a two-way road. This is just how the story ends. There’s a group of behavioral economists in that tour bus up there who decided to go. Now you’re getting a completely different sense of risk. The story here is if you’re asking people to engage in something or to not engage in something, you have to be very, very aware of just what kind of technique you’re using to present something like risk and what effect it’s going to have on your people. I leave it to the smart people at Segal Benz to figure that out as to how you communicate that. But that’s the difference between intuitive and calculative risk.

It also helps to understand the impact of nudges and how do you make nudges work. As I said before, one of the most difficult barrier, cognitive barrier is overconfidence. Daniel Kahneman, who won the first Nobel Prize in behavioral economics. The most damaging dynamic is overconfidence. The kind of optimism that leads governments to believe that wars are quickly winnable and capital projects will come in on budget despite statistics predicting exactly the opposite. I’m sure you’re all familiar with overconfidence, particularly around you. Not necessarily you have overconfidence, but we all have some level. What is it? I’m going to use an example here of overconfidence. This has to do with the space shuttle explosion. We know that humans tend to have a tendency to overestimate their own skills and predictions for success. That probably is something you, if not knew, you probably suspected.

But the history of booster rockets was one failure in every 57 attempts. That’s through experimentation, through actually launching, et cetera. But NASA was overconfident. They set the chances of an accident to one in 100,000. What that means was you could launch a space shuttle every day for 275 years and never have an accident. Well, we know what happened. How would you reframe this? When they were making decisions [inaudible 00:35:38] forewarning, the framing of the questions were, can you prove it’s unsafe to launch? Had they been asking this questions, can you prove it’s safe to launch? Just simply reversing the question, you might have gotten a very different answer. Because now you’re engaging a very different set of variables to help make that decision. Again, that’s framing, overconfidence. Now this gets in the way of people making decisions or taking actions.

A study that we did at the Retirement Research Center recently, and I’m seeing some new results this afternoon on the same study. We took up the question of does encouragement-based messaging versus here it says fear-based. I call it cautionary messaging. Which one of those has a greater effect on people’s intent to engage with their 401(k) plan? Interestingly, we had a lot of people on the team doing this study, and there was quite an active debate about which way it would go. There was not consensus on what would happen. Basically on the encouragement-based messaging, we broke our sample into two groups of 500. One of them received the message, "Great news. We project you’re on track to replace 71% of your pre-retirement income during retirement. Although you are not at 100% replacement just yet, a few changes can help you reach this goal." Encourage it.

The cautionary was, "Caution. We project you’re going to have a 29% shortfall when it comes to replacing your pre-retirement income during retirement. You will have to make a few changes in order to get to 100% retirement income replacement." It’s really just the first sentence that was changed here. Then we ask people, what would you do? Or as a result of reading this message, what would you do? Well, the green bar is the percentage of people who said that they will do these seven types of engagement more often. By that, I mean, think about progress towards retirement. Think about your contribution rate. Look carefully at your statement. Those types of things. You can see that the amount of intended engagement is almost double on all these different items. The research I’m going to see, the results of my study follow up to this were actually giving people their actual retirement readiness percentage and seeing what we track them on the internet to the extent to which they engage with the plan website.

We’ll see, again, we split the sample. We’ll see what we got. But that’s another example of nudging. Here, we simply change the tone and it’s not confrontative. It’s just giving them the same information but reversing the nature of the information. Let’s move on from there. I think you’re going to comment on this, Megan.

Megan Yost: Yep. Yeah. Interestingly, Warren, when you shared your research on that last study widely with the industry, it was reported in the news. A lot of people had different opinions about cautionary versus encouraging-based messaging. I know that a lot of record keepers and others in the industry want to positively encourage people to participate and to engage and so forth. When you, as a plan sponsor are working with your service providers and your communications consultants, you may want to think about the best time to employ this specific technique. In one case, we used it with one of our clients who had a defined contribution plan, but you had to enroll in the pension in order to participate in the DC plan. The participation in the pension was not automatic. One of the main things that they struggle with is getting people to sign up for the pension and understand the value of why it’s helpful and what it can do for them.

We help them create a series of communications that really leverage some of this cautionary messaging to help them realize that they might regret not signing up many years later when they go to retire and realize they don’t have a retirement plan that they may miss out, or they may regret not paying attention or enrolling sooner. These postcards here are examples of how we’re using these techniques and putting these behavioral nudges into practice in these communications. Additionally, we work with many organizations to create retirement income statements. In this case, as you can see, there’s specific calculations that are used to show an individual who’s participating and has both a pension and a 457 in this case. It’s a public employee. They have two parts of their retirement savings from their employer and then on their own.

In this example here, it says, I just have to move a bar down. It says, unless you take action soon, it looks like your estimated annual retirement income from the retirement plans combined with an estimate of your anticipated social security benefit is not on track to be at least 80% of your final full-time earnings. Really helping people understand the consequences of... There are a lot of numbers on this income statement, but what does this actually mean in real dollars or in paycheck terms to someone who may not really understand what all these numbers mean or how that might impact them in the future? Warren, I’m going to turn it back to you to talk about enhanced active choice in a little bit more depth.

Warren Cormier: I’ll give you an example of it too. Enhanced active choice is a voluntary model that’s predicated on a greater level of awareness of the consequences of choice. When we are doing research, live research with some plan sponsors that were participating with us, one of their biggest concerns was that people really don’t understand the consequences of their choices. That if you decide not to enroll, or if you decide not to contribute the max, you need to be thinking about the consequences of that. I’ll show you some of the impact of that. By highlighting the losses of the non-preferred alternative, in this case, not enrolling, and gains of the preferred and alternative enhanced active choice impacts savings and it works. The individual is asked to make a choice in the context of the potential impact of their choice. As a result, the individual is more likely to take the better choice. I say better, imagine the air quotes around that. I think that saving for retirement is better than not saving for retirement, unless in severe economic conditions. Let’s go on to the next slide. Actually, you did something on this, Megan.

Megan Yost: This is an example of enhanced active choice really in everyday life. You see this in consumer marketing all the time whether you’re aware of it or not. This is something that is wanting you to sign up for, to subscribe your email in the future so that you can get a discount but you’re also on their mailing list going forward. It says like, "Since the best things in life aren’t really free, enter email and get 10% off." Then in the way this is designed, you say, no, I don’t want 10% off. That is minimalized compared to all the savings that you’ll have by doing the thing that they want you to do. This is one way that it’s presented and how the choices is designed that may influence your behavior in real life. We’re going to show you the parallel example in retirement savings next.

Warren Cormier: There are four ways that you ask or that plan sponsors have historically ask people to participate in the DC plan. There’s the opt in, "Please check the box if you choose to enroll in the firm’s 401(k) plan." No sense of consequences there at all. The auto enroll, "Check the box if you do not choose to enroll in the plan." Active choice, which is I will choose one box. I will enroll. I will not enroll. None of them are talking about consequences. However, this wording here is enhanced active choice, which is a nudge. This is how, actually I put in here how our plan sponsors that we’re participating would like to have stated the options and the consequences. We didn’t use them because you’ll see they’re a bit severe and probably never would’ve passed compliance. But yes, I want to enroll in the firm’s 401(k) plan to ensure I will enjoy a comfortable lifestyle for the rest of my life even after I stop working. Or no, I don’t want to enroll in the firm’s 401(k) plan even if this step will help me avoid a poor lifestyle knowing someday I will have to stop working.

Now clearly, dealing with consequences, clearly dealing with positive as well as negative consequences. Clearly, the preferred action is to enroll in the plan. As I said, these are extreme and you could never make these promises in the real world. This is actually how plan sponsors, some of them, I should say, not all of them would like to have expressed the choices. But that’s what we mean by enhanced active choice. We actually did a live experiment with enhanced active choice with the concept of save more tomorrow, which is automatic deferral increase program. You can see the percentage of people who were contributing or using the smart program, the automatic deferral increase. But then when we implemented EAC where we talked about the necessity of increasing contributions over time, et cetera, you can see the impact right away of the increase in enrollment into automatic deferral increase.

By the way, the reason this was stepped in results was because the plan sponsor had a supply of old forms and they needed to use them up. As those forms ran out and the new forms were replacing all of them, we saw that the increase became even more and more. Let’s go on from there, Megan. Actually, we’re running out of time, Megan. Why don’t we jump past this one? We can stop there. What was happening was there was a study that one of our team members, Punam Keller, did with CVS. This was asking people or encouraging people to use automatic by mail fulfillment of prescriptions. All you had to do on this was before the EAC was used, you just say, click here if you want to use automatic fulfillment. It was added another button which said, you can rely upon yourself to not forget, or you can click this button. We had 79% increase in the people opting in to this free, by the way, automatic mail delivery of prescriptions. That said, I think we’re moving back to you, Megan, after the slide.

Megan Yost: Yep. We’re getting a couple questions here. Someone asked about EAC. It stands for enhanced active choice. It’s providing choice but providing a little bit more context about what happens when you make one choice or the other choice. A couple other things we wanted to highlight is how you can help people make choices by showing them examples of personas. Other people and how they’re thinking about choices, we use this a lot with our clients when describing the benefits they’re using or helping them understand benefits that might be relevant to them at various points and stages of their lives and different things they want to be considering at those different stages and phases of their lives. Additionally, social proof is another way to frame information to people. We’ve talked a lot about framing throughout the presentation. You may be trying to encourage someone to participate in an employee stock purchase plan, for example.

But if you use the percentage of people who are actually participating, it might actually convince people to take it more seriously or to consider it a little bit more deeply than they otherwise would when framed the first way on the left side of the screen here in blue. Someone asked a question about seeing relative value in peer comparison and motivating people to save for retirement. Yes, this is exactly what we’re talking about here. When you can frame something around like 98% of your colleagues are participating in the retirement plan, join them. That kind of motivating factor of not wanting to miss out or to want to follow the herd, you can use positively to help people take those steps towards planning and saving for retirement. Another question we got is about firms investing in any AB testing to determine the best way to encourage retirement savings.

I can say that we do sometimes see people willing to test one headline or one message versus another to different groups. I think especially if organizations are communicating more frequently, then they’re more likely to try that method. You can work with your record keeper or your communication partners to see if that might be an option to really look at what’s driving behavior and what people are responding to when you send communications. One example to one group, another example to the other, asking them to ultimately do the same thing and which one’s most effective. Warren, do you want to answer anything or add any color to that in terms of AB testing?

Warren Cormier: Nope.

Megan Yost: All right. We have just a few minutes here. I’m going to go fairly quickly through this section about applying insights from behavioral science to communications. There are a number of different things you can do to help people process information. You can prime them to what you’re wanting them to do and get them ready for it through a campaign. You can repeat things and communicate really consistently over time. You can use different techniques to anchor them on certain things that are really important, like how much they might want to replace of income in the future. Rhyming helps people process information more quickly, and it’s fun to do in communications. Targeting, which is sending specific messages to specific groups of people. Priming is an example of where you’re using a lot of different channels, a lot of different communications methods and you’re orienting people towards a goal. You see this a lot right now during annual enrollment.

You might see it in other types of enrollment for specific features within a retirement plan where you use a number of different techniques to get everyone to realize like this date is important. You need to do something by this date. You can use novelty to get people to understand this in a variety of different ways. We have a couple examples here of fun stair clings and coffee cup sleeves, and so forth. Repetition is one of the most important techniques in benefits communications, especially helping people to become more familiar with unfamiliar topics. Within a campaign, if you’re trying to get people to do something, to say the message in a lot of different ways throughout the campaign, through different types of media. But also over the course of someone’s career and over the course of their lifetime, the way that adults best learn is through bite size pieces of information that’s built through repeated interaction over time.

Continuously communicating with people is really important because if you don’t communicate and they don’t have any interaction for a period of time, they forget information just like you forget your high school Spanish or anything else you learned that you don’t regularly engage with on a everyday basis. Anchoring is another important technique where you’re trying to set the bar or help people lock into a certain number or something that they might need to be doing. Instead of saying to people, save at least 3%, because the match is 3%, using what financial professionals recommend as like saving at least 15% of your salary will help you save and be in a good shape for retirement. Using things like that to get people focused on that higher benchmark or that higher savings rate may inspire them. They may not be able to do it, but it might help them understand where they need to be at the highest level instead of the bare minimum. Then we have some fun headlines here like enroll today for lifelong pay. Again, it’s really simple.

This is why Dr. Seuss and all these other authors use rhyming in children’s books, because it really helps people process information more quickly. Then finally, targeting. You can target by attitudinal segment. You can target by behavior. You can look at the people who are not participating in the plan and specifically send communications to them. You can use things that make things feel more personalized and targeted even if they’re not, like referring to people as you, instead of employees or participants. Make it feel more personalized and more like you’re speaking directly to them. We have just a few minutes here. I don’t know if we have any other questions. I don’t see any in the Q&A. Warren, one question I have for you is, is there a behavioral finance like a technique from behavioral finance that’s more effective than others getting people’s attention?

Warren Cormier: It would be enhanced active choice. It’s got to be up there at the top. Reframing is critically important. Remember, overconfidence is probably the most dangerous barrier to good decisions. People need to understand the effective time, the magnitude of time, et cetera. That reframing and enhanced active choice tends to help people kind of reset and rethink their priorities.

Megan Yost: Yeah, I see. One more question here about, we mentioned that plan sponsors have been using features such as auto enrolling and auto escalating new hires into their DC plans. What about participants who were hired before those features were added to their plans? What if they’re participating but not saving enough? That is a great question. It’s something that is really important when you think about the overall experience of all your participants in the plan. Particularly if you think about wanting to make sure everyone is using the plan to its fullest. You may want to re-enroll or essentially ask everyone, prompt them to reevaluate their savings rates. If they don’t make any action, save them at a higher rate than they were if that’s where your plan is now and you didn’t have in the past. You can target that group or you can do it to the entire population to reset everyone, essentially at a new savings rate in your default investment, if that’s a target-date fund or whatever that is.

That’s a great way to ensure that those longer tenured employees are saving appropriately for retirement, that they may have missed out on those features that were mentioned in the question. All right. Well, thank you all for joining us and taking time out of your busy days to listen in and participate in this discussion. Please feel free to reach out to either Warren or myself if you have any further questions. Again, we will post this webinar and we’ll share it with you in the following days. If you want to go back and take any more detailed notes, you’re able to. I just want to thank Warren for joining us in this discussion. Always love hearing everything that you’re doing and all the research and wisdom you have to share about everything that you have learned about behavioral finance. Thank you for being part of our discussion today. All right. Thank you, everyone. Take care.