Using Behavioral Finance to Boost Retirement Security

The International Foundation of Employee Benefit Plans (IFEBP) issued a white paper, “Ten Ways Behavioral Finance Can Boost Retirement Security.” IFEBP says this is based on emotional, social and cognitive factors.

“The insights of behavioral finance have the potential to help employers, plan sponsors and plan administrators make changes that can yield a substantial difference in the actions of employees and plan participants,” the organization says.

First, because people are loss-averse, it makes sense to stress what could be gained or lost, IFEBP says. On the gain side of the equation, sponsors can tell participants that planning for retirement is how dreams become a reality and that contributing to their retirement plan qualifies them for the company match. On the loss side, they can say that by not contributing, participants are losing out on the match and the reduction in taxes.

Second, sponsors can point out what others are doing right, because people tend to want to conform to the social norm. They can accomplish this, for example, by telling participants what percentage of their workforce contribute to the plan and how much they are deferring.

Third, IFEBP recommends sharing stories, or testimonials, rather than stressing statistics. “People are much more likely to be motivated by a testimonial concerning an individual’s circumstances that taps their emotions,” the group says.

Fourth, sponsors should encourage individuals to picture their retirement in order to shift their focus from the now to the long term. “Having a personal retirement picture helps people avoid temptations to spend today,” IFEBP says.

Next, sponsors can set up competitive games, like having workers compete to see who can save the largest percentage of their salary and offer prizes such as gift cards, a free lunch or vacation days to the winners.

Sixth, automatic features that require people to opt out rather than opt in are effective, the group says.

Seventh, IFEBP recommends streamlining the investment menu. A cluttered menu can lead to workers feeling overwhelmed and ending up not doing anything. The organization says that experts say the right number of investment options is between five and 10 and that the lineup should be evenly split between aggressive and conservative choices.

Eighth, because people tend to choose offerings at the top of a list, the organization says that sponsors should structure the list of investments in the plan so that people are first offered well-diversified funds such as a balanced fund or a target-date fund (TDF).

Ninth, stretch matches often encourage people to save more, IFEBP says. “People tend to follow their employer’s message,” the group says. So, if a sponsor offers a stretch match up to 6% or even 10%, more participants are likely to go the extra mile.

Finally, the group encourages sponsors to provide access to a financial adviser. “DC [defined contribution] 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,” IFEBP says.

The white paper can be downloaded here.