What can be done differently to encourage workers to take the steps required to improve their retirement security? Behavioural finance examines how emotional, social and cognitive factors influence our decision making. It tells us that retirement plan design and communication is too often based on assumptions about people that are wrong.
People don’t always approach retirement decisions (in fact, all sorts of decisions) in a rational way that is in their best interests. The insights of behavioural finance have the potential to help make changes that can yield a difference in the actions of how people save for retirement.
Here are the first five of ten tips based on the principles of behavioural finance for helping people achieve a secure retirement.
1. Stress what could be gained or lost. A chief tenet of behavioural finance is that people are loss-averse. People are highly motivated to avoid what they consider a loss. In fact, losing hurts worse than winning feels good. So, frame messages so individuals will clearly understand how they might “gain” by taking action or “lose” if they don’t take action. For example:
a. Planning for retirement is how dreams become a reality. (Gain frame)
b. Would you like a 5% pay increase? Take advantage of your retirement plan match. (Gain frame)
c. Stop missing out on your retirement plan match. (Loss frame)
d. Would you rather pay yourself or the government? Increase your retirement savings and cut your taxes. (Loss frame)
2. Point out what others are doing right. When making choices, people tend to do what they think most other people are doing because they believe there is less chance, they will make the wrong choice. They are also influenced by what they think is expected or socially acceptable. Using social norms can help drive people to take a specific action. Consider these two messages to convince workers to save for their retirement:
a. 80% of ABC employees contributed to their retirement plan last year.
b. Nine out of every ten new hires say “yes” to save 15% of their pay for their retirement.
The more similar the people described in a message are to those being targeted (e.g., people in the same building or organization), the more likely they are to copy the behaviour desired.
3. Use testimonials versus eye-popping statistics. Rarely does a day pass when there isn’t a news story backed up by statistics warning there is a retirement crisis ahead. Consider this headline:
Experts warn 1 in 3 could face poverty in retirement.
Those among us who are more analytical may feel that using numbers will motivate people to start saving for retirement. Not true, in reality, few people are motivated to act when they are given statistics. People are much more likely to be motivated by a testimonial concerning an individual’s circumstances that taps their emotions. If you just can’t resist including a few statistics in a communication piece, relegate the numbers to footnotes.
4. Encourage individuals to picture their retirement. People have a tendency to focus on the short term versus the long term. Given a choice, they usually select a smaller payoff now versus a bigger payoff later. They are more likely to buy something for today or set aside money for a vacation in a few months than save for retirement. The short-term purchases are more tangible.
One way to help counter workers discounting their future is to encourage them to envision their future retirement— where they want to live, what they want to do, etc. Having a personal retirement picture helps people avoid temptations to spend today, which can derail their retirement.
5. Leverage competition. Some people are motivated by competition. Competition with oneself and others can also be used to promote retirement savings. Try challenging individuals to defer at least 10% of their annual salary for retirement. Or have groups compete to see who can save the largest portion of their income on average. Employers could offer prizes like gift cards, a free lunch or vacation days to the winner(s).
No comments:
Post a Comment