64% of Americans aren’t prepared for retirement. A single tweet by Elon Musk sends stocks of companies racing. People are more likely to invest in instruments they’re familiar with, despite the risks. None of these investment decisions sound rational, or even smart, but they’re very common.
As Kate Mielitz, accredited financial counselor and assistant professor at Oklahoma State University puts it: “People are not rational, and because we are not rational, we don’t make perfect economic decisions.”
Financial institutions that understand this — and the intricacies of how these psychological aspects play out — can serve their customers better. In this article, we explore four specific ways in which plan administrators can leverage behavioral science to help participants with retirement planning.
How participants in the retirement industry behave?
But first, let’s understand common investment behavior patterns among participants in the retirement industry.
Hyperbolic discounting: Participants tend to choose immediate rewards over future returns, as seen by how 58% of Americans do not have a formal retirement plan in place.
Avoidance: Participants avoid or procrastinate on retirement planning thinking it’s at a distance. 48% of respondents said were not bothered by how much they had saved up. Nearly half of those in their 40s “have withdrawn money from their retirement accounts because of unexpected life events”.
Overwhelm: The general confusion around financial matters, compounded by the multitude of options available overwhelms most participants. So, they either don’t invest at all, or invest in familiar instruments like their savings accounts. 46% of those surveyed used a savings account for retirement planning, while only 14% chose individual retirement accounts.
Underestimating the advisor: 80% of those who took the online quiz on financial literacy failed. Only 1 in 5 Americans have the knowledge to plan adequately. And very few of them have a retirement plan advisor.
There is plenty of opportunities for plan administrators to understand their customers better. By leveraging behavioral finance technology, plan admins can offer meaningful and effective retirement solutions for participants across varied demographic and psychographic profiles. Here’s how.
4 behavioral triggers to improve customer experience in retirement planning
#1 Invoke emotional connection with visualizations
Researchers invited participants to visualize aging with 3D avatars. This realistic peek into the future made them invest 6.8% of salary (as opposed to 5.2% before visualization) into their 401(k) plan.
Visualization triggers emotional connection, making it a strong influence in decision-making. You can use visualization to:
- Build retirement goals with better clarity
- Present retirement plan options to enable better decision-making
- Create personalized interventions such as notifications, targeted ads etc. to maintain ongoing connections
#2 Make investment a habit
Today’s consumerist culture encourages spending for everyday luxuries, bills, entertainment etc. over long-term savings. As a result, individuals — even those intending to start saving — procrastinate on making it a habit.
By eliminating the need for them to take action, with automation, you can help build a habit among participants. For instance, employers’ workplace retirement plans can leverage automated savings facilities such as automatic enrollment, automatic allocation (using target-date funds) and automatic escalation (a periodic increase of savings).
Participants also find this beneficial. Studies show that those who signed up for auto-enrollment were on track to replace 94% of their income in retirement and those who chose to auto-escalate (automating increase in contributions over a period of time) were projected to replace 107% of their income.
#3 Build community plans
While ‘herd mentality’ is often seen as a negative, plan administrators can leverage this tendency to make decisions as a community to encourage better behaviors. One of the popular examples of this is the workspace savings plan. Employers offer investment options for their employees to choose and designate a certain amount of the paycheck for retirement savings. When employees see their colleagues invest, they are more likely to follow suit.
In fact, over 60% say that a workspace savings plan is a must-have for a prospective employer. With advanced analytics, plan sponsors can also gain insights from the organization and offer personalized plans based on employee incomes, roles, personal information, spending patterns, existing challenges etc.
#4 Suggest where to contribute
A study that looked at retirement planning of U.S army members found that if a pension decision required too much thought, the participant may contribute less. By processing the information and offering suggestions, plan sponsors can offer the right tools that aid decision-making among participants.
- With machine learning, plan sponsors can develop meaningful insights that help individuals to invest better.
- Intelligent risk models, derived from their financial choices, can help reassure them about their future.
- Automated dynamic recommendations can ensure participants are on track on meet their financial goals.
There is no one-stop solution in retirement planning. With advanced retirement planning technologies, financial institutions can decode their customers’ needs and develop holistic personal finance management solutions.