Beth Perry, a social scientist with the Federal Retirement Thrift Investment Board (FRTIB), said different worker behaviors affect how participants allocate and save their money. One tactic that could help participants, she said, is lessening the load of information available to workers. Instead, she said, focus on one point.
During the webinar, Perry used an example from a bank in South Africa. An employer sent eight different letters on loans to 50,0000 former customers, one suggesting how participants may use the money, another comparing rates to other banks, and others implementing shorter deadlines for taking out loans. None of the options was successful in retaining participants for loans.
In another version of the letter, the bank offered four examples of the types of loans that participants may take out, and, in yet another version, it only offered one loan. “Dropping from four examples to one was as effective as reducing the interest rate by 26%,” Perry noted. “In other words, giving people less is just as well as putting the loan on sale. It’s often tempting to put all the information, and, ironically, this can decrease comprehension.”
Perry used another example of a retirement plan in New Hampshire that was experiencing low participant enrollment rates. When the plan conducted focus groups to understand why participants were not saving, it found that most workers wanted to enroll, but the process was too complicated for them to understand. When the plan created a simple guide explaining how to sign up, the plan’s numbers tripled and quadrupled over time. And, when the guide was recreated to add one additional step to the enrollment process, it became a little less effective in the short term.
“We have to keep that in mind when developing policies, guidelines, programs, etc. How hard is it for people to follow through? How many steps are there? That can make a difference,” Perry said.
Perry said there’s another component that’s important when it comes to financial decisionmaking: time. A 2014 study by TIAA found that most participants barely spend two hours a year planning their investments. Perry noted that while it can be tempting for financial professionals to believe participants have more time than they say they do, retirement plan professionals need to meet their participants halfway. “We can’t just assume that people have all the time in the world to synthesize, to go through 30- or 40-page documents and figure out what to do,” Perry explained. “We have to make things easy and simple.”
How much time people have in a day connects to the level of cognitive overload they are willing to take, Perry further explains. If a participant has 30 investment options to choose from, that requires him to get up to speed with 30 different choices, she says. A lot of workers—and especially those who serve as caregivers—don’t have the time in their day to make such a large decision regarding finances, health care or retirement plans. Instead, she recommends breaking choices down into subcategories to avoid overwhelming participants.
“Break it down so that these five plans are better for those who need X,” she says. “Breaking things down into friendly, easy, surmountable numbers is really powerful.”