Day One of the 2017 PLANSPONSOR National Conference kicked off with an engaging discussion by Punam A. Keller, Ph.D., Charles Henry Jones third century professor of management, Tuck School of Business at Dartmouth.
According to Keller, increasingly, a significant number of adult Americans do not trust the government and the financial industry to help secure their retirement. The absence of trust puts more onus on the individual and plan sponsor to manage retirement funds. Current enrollment nudges such as opt-outs and opt-ins are insufficient to prompt trust in plan sponsors.
Keller comes from three perspectives. She said she cares very deeply about employee well-being. “You can get pretty much anything done if you find the right team. But, often, it’s not that they don’t have the right ability—other factors may hinder productivity, such as a lack of engagement and loyalty,” she told attendees. “Emotional stuff can drag you down.”
Keller is also a marketing professor, but her focus is on social marketing; she uses marketing techniques and tools for social causes. Finally, she is a behavioral scientist. “I don’t just want to change attitudes, but I want to effect behavioral change.”
How does all this apply to defined contribution (DC) retirement plans? Keller said lower trust in plan sponsors and providers requires a change in nudge features and contended that enhanced active choice (EAC) is an effective communication tool that can be used to increase trust in the plan sponsor and increase DC plan enrollment and participation rates. “EAC bestows control, reduces procrastination, and increases trust and enrollment,” she said.NEXT: The difference trust makes, and what is EAC?
“If you can’t connect with who you were when younger—i.e., what was I wearing, what’s up with the hair, what was I thinking—how can you relate to a future self you haven’t even experienced?” Keller noted.
She added that we operate at a level of satisfying emotions, not savings and compounding interest.
Polarized trust in government administration reduces trust in government mechanisms such as Social Security; lower expected returns may decrease trust in agents and certainty of outcomes; and the most vulnerable populations are the least likely to trust financial institutions and instruments, Keller has found.
People with low trust think about desirability, i.e., why they should I do it, versus those with high trust who think about how to do it. People with low trust deliberate—question what decision to make and whether they have enough information to make a decision—while those with high trust just implement a suggestion.
EAC includes no default, but a compulsory choice. Keller said this works only with “ought” behaviors—we know we ought to save for retirement—certain outcomes—we can’t say if you save for a lifetime, it will guarantee a secure retirement lifestyle, but we can say it can improve your retirement lifestyle—explaining the desirability of the new option and the cost of the old option.
Active choice allows employees to check one box, “I will enroll” or “I will not enroll.” Keller explained that, with EAC, the choices given are, “Yes, I want to enroll, knowing it will help me enjoy a comfortable retirement,” and “No, I don’t want to enroll, even though this could help keep me from living a lifestyle of poverty in retirement.”
Keller said the problem with automatic plan features is they don’t teach the participant about decisions and taking responsibility. But EAC can be used with auto plan features and will make participants accountable for future decisions. For example, even if a plan is using with auto-enrollment, it can use EAC to get participants to increase deferral rates. EAC can also be used to decrease plan leakage by making clear what will be the cost effect of the decision to take a loan or hardship withdrawal.
EAC is about regret aversion.NEXT: Case studies
Keller shared with conference attendees some case studies of how EAC has worked.
For example, plans and highlights can increase participation for motivated employees. One company used videos of employees talking about why they save, using people varied in income and age. It also gave employees a list for enrolling, telling them how much time each step would take and what they need to prepare for each step such as Social Security numbers for beneficiary designations. The plan saw an increase in enrollment of about 10%.
Another firm reframed its communication about a benefit. Instead of just saying the job pays an end-of-year bonus of $2,000 but you will save $2,000 in transportation cost each year, the firm added in, “This would be equivalent to getting $2,000 in extra earnings and you can allocate this income to other things.” This reframing increased enrollment about 22%.
Another firm created a brochure titled, “Give yourself a bonus today.” Keller explained that brochure was designed to build trust through optimism; it expressed empathy with no jargon; it included white space to encourage reflection; there were no lifestyle images that could sway emotions in another direction; it gave guidance with step-by-step instructions; it focused on participants’ needs; it did not overwhelm participants with more information than was necessary; and it did not talk down to participants or use an institutional tone of knowing what’s best for them. The brochure resulted in a 25% increase in voluntary enrollment in the firm’s 457 plan, as well as a more than 600% increase in the use of auto-deferral escalation.
While EAC was shown to improve outcomes for participants, Keller wanted to see if it increased trust in DC plan sponsors. So, one firm offered an EAC choice to enroll in the plan, as Keller previously explained, an EAC choice that was a little less negative for the choice not to enroll, and also the standard yes or no opt-in choice. Not only did more employees respond to the EAC choices, but they said the EAC messaging made them feel the company cared about them and that they can rely on the company if they have problems.
“We can’t ignore that emotions are a large part of how people make decisions,” Keller said. “Behavioral science techniques can help manage emotions and improve outcomes for participants.” She also noted that the studies found young employees actually like this better than older employees.
All these steps are changes in communications, so they are efficient and cost-effective, Keller pointed out. But, she warned that DC plan sponsors really need to think about whether they should use EAC with their employees. “If most employees go to payday lenders, should you really offer this, or encourage them to pay down debt first?” she said.