There are many factors that influence current and prospective plan participants’ choices regarding saving for retirement. A professor argues that advisors and others would do well to be mindful of a factor many do not consider: individuals’ emotions.
At last month’s National Association of Government Defined Contribution Administrators (NAGDCA) annual conference in Philadelphia, Punam Keller, a professor at Dartmouth’s Tuck School of Business, argued that emotions and feelings influence choices about saving for retirement — and even whether to participate in the first place.
Keller observes that the abilities to think and to feel are housed in different places in the brain, but they nonetheless “are in constant communication” and have a “bi-dimensional” relationship. This lays the physiological groundwork for the interplay between rationality and emotions in making decisions — including those concerning retirement saving.
Current means of motivating and informing potential plan participants and existing plan participants are inadequate for meeting both the rational and the emotional, Keller contends, asserting that “Current nudges do not manage emotions.”
There are four ways to approach participation in a retirement plan on an application or enrollment form, Keller says, and one plays on employees’ emotions as a device to increase enrollment and participation:
- Provide a box on the form to allow employees to indicate that they want to opt in.
- Put automatic enrollment in place, and provide a box on which employees can indicate that they choose not to enroll.
- Provide two boxes; on one, employees can indicate that they want to enroll, and on the other, they can indicate that they do not want to.
- Provide two boxes; on one, employees can indicate that they want to enjoy a comfortable lifestyle for the rest of their lives, and on the other, they can indicate that they do not want to enroll even though that would help to avoid a lifestyle in which the employee will be poorer because they choose not to participate.
One of the emotions Keller considers relevant to retirement saving is regret — both post-decision and anticipatory. The latter, she says, is defined as the feeling that there will be negative consequences of a decision before the choice is even made, and it forces plan participants toward a safe option through risk aversion. The theory behind anticipatory regret, Keller says, is that when facing a decision, individuals might anticipate regretand incorporate in their choice their desire to eliminate or reduce the chances that they will feel it.
A good way to harness emotions in a positive way is through what she calls “enhanced active choice” (EAC), a method that minimizes regret aversion and encourages participation in behavior that results in saving money. An example of the use of EAC is to create boxes on an enrollment form so that employees have a choice such as this:
__ Yes, I want to enroll in the firm’s 401k plan to ensure I will enjoy a comfortable lifestyle for the rest of my life, even after I stop working.
__ No, I don’t want to enroll in the firm’s 401k plan even if this step will help me avoid a poorer lifestyle knowing someday I will have to stop working.
Keller says that in a case study of a plan that employed the principles of EAC found that in six months, plan participation increase by 25% and the use of auto-escalation jumped by 600 percent.
According to Keller, elements that are central to EAC include:
- encouraging active choices by participants and potential participants by not offering a default and making a choice compulsory;
- focusing on behaviors in which employees ought to engage;
- making it clear what outcomes will result from various choices;
- the feasibility and desirability of new options; and
- the cost of choosing to remain with the option employees had chosen before.
Keller argues that EAC makes choices simple, highlights the desirability of options and reduces procrastination. She adds that it makes participants and potential participants feel more in control and more committed; in addition, she says, it heightens accountability, trust and satisfaction.
“Effective communications relies on interdisciplinary strategies from behavioral finance, communications theory, and human-centered design,” Keller says.