What stops us from making good financial decisions? In a recent International Foundation member webcast, Using Behavioral Tools to Drive Better Decision Making, James V. Bracchitta, CEBS, a labor trustee on the Screen Actors Guild Producers Pension & Health Plan, shared ideas on what prevents us from making good financial decisions and what retirement plan sponsors can do to combat these natural human tendencies by tapping into behavioral economics.
Throughout the webcast, Jim shares practical tips about how you can use your (newly gained) understanding of behavioral economics to your participants’ advantage when educating participants about their financial choices and retirement readiness.
More important than participants understanding their benefits is that they make good decisions about their benefits. A plan sponsor is a choice architect who has indirect influence on participant decision making by designing plan features and communications. Choice architecture is the design of different ways in which choices can be presented and the impact of that presentation on decision making. For example, people who don’t enroll in their retirement plan are making a choice to do nothing. You, as the choice architect, can design your plan with autoenrollment and autoescalation features. Make the GOOD decisions easy!
People don’t always approach retirement decisions (in fact, all sorts of decisions) in a rational way that is in their best interests. One of the natural stumbling blocks that gets in the way of good decision making is loss aversion. We feel the pain of a loss far greater than we feel the pleasure of a gain. When we have to cut spending now in order to save more for retirement, it feels like a loss.
Use loss aversion to your participants’ advantage by stressing what could be gained or lost. Frame communications so participants will clearly understand how they might gain by taking action or lose if they don’t take action. For example, when communicating the company’s match, focusing on gain and loss could look like this:
- Stress gain: Get a 5% pay increase—Take advantage of your plan match.
- Stress loss: You lose $X every month if you don’t take your plan match.
Tune in to the recorded webcast where Jim breaks down financial decision theory into practice. You’ll be able to take away retirement communication strategies to use for each decision-making stumbling block that Jim explains. Add your ingenuity and creativity to customize for your participants.
Jenny Lucey, CEBS
Manager, Reference/Research Services at the International Foundation