Can a doctored webcam photo save your retirement?
Prudential Retirement executives last fall installed a photo kiosk at an employee benefits fair so people could see pictures of themselves altered to look 65 years old or so. The reactions were "priceless," said Jennifer Putney, vice president of participant engagement—but that wasn't all. The number of people who enrolled in a retirement plan or increased their contribution rate went up 60 percent from a year earlier, before the kiosk was installed, she said. (Tweet This)
With another benefits enrollment season upon us, tools like photo doctoring are proliferating—firms like Merrill Edge even use webcam images to provide the service online—as behavioral scientists search for ways to use ingrained patterns of behavior to induce people to save more for retirement.
"A lot of self-control problems" like poor diet and exercise habits "are difficult to help people with," said Shlomo Benartzi, accounting professor and co-chair of the behavioral decision-making group at UCLA's Anderson School of Management and chief behavioral economist at the Allianz Global Investors Center for Behavioral Finance. "What's unique about retirement is it's a more controlled setting where we can actually help people."
One impulse experts are trying to control, or even overcome, is inertia, especially as it relates to retirement saving. Left to their own devices, many employees fail to sign up for a 401(k) or similar plan. But when plan sponsors automatically enroll employees in their plans, and offer an "opt-out" option instead, the number of participants can increase dramatically. In one study, participation rates among employees under age 25 rose 39 percentage points, and 27 points for employees 25 to 34.
Granted participation is only part of the solution to the retirement savings shortfall. If people automatically enroll at too low a level, they still may not save enough. And that does happen: A recent study by Vanguard found that average contribution rates declined from 7.3 percent in 2007 to 6.9 percent in 2014, and chalked it up to the spread of automatic enrollment.
By the end of 2013, about 65 percent of companies reported having auto-enrollment programs, a feature that became increasingly widespread after passage of the Pension Protection Act in 2006, which provided safeguards for employers that adopted it. But the default contribution rate for many plans with auto enrollment remains at 3 percent, the amount many companies adopted when they first added the feature.
Still, increasing participation in plans is a first step, and a slowly growing share of employers is offering programs that automatically increase contribution levels. Benartzi also pointed out that once people are participating, inertia can work in their favor in that they will likely refrain from trying to time the market with their retirement savings.
Simplifying enrollment in retirement plans, or at least making participation more enjoyable, can also combat inertia. Benartzi is arguing for a retirement savings app, for example.
Making retirement savings more like a game is another idea being put forward by people like Jane Souza, senior vice president for digital platforms at Fidelity. This could include personalized messages when people hit a given savings target, or interactive models that show you how different life choices affect your future finances.
"If you make things more fun, if you give people positive reinforcement, they will make more choices to get more positive reinforcement. It's playing into what is naturally motivating to people," she said.
Our tendency to procrastinate also gets in the way of retirement savings. That's why Benartzi and Richard Thaler of the University of Chicago developed the Save More Tomorrow model. Instead of asking people to save enough for a time far later in life, participants pledge to increase their retirement savings contributions every time they get a raise.
In the first use of the plan, employees' savings rates more than tripled, and it has been widely adopted. (The initial format works best when employees can be certain of the size and timing of their raises, like at a unionized manufacturing company, for example. But Benartzi said the approach works almost as well when people pledge to increase their contribution at any fixed time, like every Jan. 1.)
Anchoring is another common behavior that retirement experts are trying to use to their advantage. When people are presented with two or three choices for retirement saving, they tend to choose the "baseline," or the the lowest option, Souza said.
If the baseline is set too low, people will wind up saving less than is optimal, she said. But "you can start by presenting the lowest number in that set as still being a very healthy contribution rate." Fidelity offers a digital retirement-plan enrollment model that recommends a baseline contribution rate of 8 percent. The majority of plan sponsors use that, Souza said, and 60 to 65 percent of the model's users choose it.
Another behavior affecting retirement saving is loss aversion: People generally prefer avoiding pain to acquiring a gain. Since putting money away cuts current income in exchange for an abstract benefit in the distant future, that behavior impedes saving.
That is why some experts argue for making the rewards of retirement saving more concrete and immediate. John Shoven, director emeritus of the Stanford Institute for Economic Policy Research, believes this approach may also help encourage people to wait until they are older before claiming Social Security. (Waiting from the eligibility age of 62 to the oldest claiming age of 70 boosts benefits by 76 percent, but few people wait that long.)
"There is literally no better way for somebody in their 60s to save than by delaying Social Security," Shoven said, and if people are shown the benefit increase as an annual rate of return, they may be more inclined to delay their claim.
With the typical working–age household having just $3,000 in retirement assets, it is not hard to find signs of an impending retirement savings crisis. But if the behavioral scientists are on the right track, our own quirks and habits could help head it off.