For DC plan sponsors and service providers, encouraging participants to save earlier and save more can depend on the style of their education efforts as well as the substance.
Financial behavior research, targeted communications and digital approaches to education played prominent roles at Pensions & Investments' East Coast Defined Contribution Conference March 6-8 in Miami, where sponsors, consultants, service providers and financial behavior researchers gathered to compare notes and share experiences.
“We need active engagement” of participants, said John Beshears, professor of business administration at Harvard Business School. Auto features “get us part of the way” to helping participants improve their retirement savings, but “active engagement is needed for the rest of the way,” he said.
Mr. Beshears offered some examples of how behavioral finance can be used to improve retirement savings, but he also noted some efforts don't always work as predicted – and might even have unintended consequences.
One problem encountered by plan executives is the complexity of a DC plan, he said during a keynote address March 8. Participants procrastinate if they must spend a lot of time contemplating multiple choices, and the process is even more difficult if participants lack adequate financial literacy.
For example, in a study of employees who hadn't enrolled in a plan, he found that “left to their own devices,” participants would slowly, modestly increase their participation rates. However, when other non-enrollees were sent a pre-selected contribution rate and asset allocation in a simplified enrollment form, their participation rates climbed significantly faster and farther than the other participants. “Simplification works in many situations,” Mr. Beshears said.
One strategy that didn't work as expected was the use of social norms — trying to encourage low savers to raise their account balances by showing them the average higher savings rates of their peers. The hypothesis is that the low savers would be motivated to improve because “people often imitate their peers,” Mr. Beshears said.
Researchers sent simple letters to non-enrolled participants — stratified by age groups — telling them to join their peers and illustrating how their peers were saving.
Comparing groups of participants that received information about peers' savings behavior vs. those that didn't receive information, Mr. Beshears said the latter group had a better enrollment rate during the next month than did the former.
Reviewing the data, Mr. Beshears said the strategy backfired because lower-income participants were the most discouraged. They believed “I'm never going to catch up, and they shut down,” said Mr. Beshears. He added that using social norms to encourage greater retirement savings must avoid triggering a comparison of lower-paid participants with higher-paid participants.