Behavioral economist Shlomo Benartzi has done some pretty amazing things in the study of retirement savings and in efforts to increase allocation amounts. But what happens when technology is introduced?
Voya Financial’s Behavioral Finance Institute for Innovation—of which Benartzi is its senior academic—decided to find out.
In a working paper titled “Save(d) by Design,” UCLA’s Benartzi and scientists from Carnegie Mellon University and University of London published results from studying more than 8,500 employees across 500 workplace retirement plans.
The workers, who were auto-enrolling into their employer-sponsored 401k plan, visited their respective enrollment websites to either confirm, decline or make personal adjustments to their savings selection.
The study examined what would happen to their choices when three types of design enhancements were made to the site. They included:
- moving important plan information (i.e. the default savings rate) closer to where the individual was prompted to act;
- simplifying and standardizing the language associated with the enrollment options; and
- changing from a single color design on the election buttons to three “traffic light” colors.
The findings revealed that small digital changes can lead to big results in terms of greater personalized enrollment, more employees taking advantage of the full company match, increased savings and improved long-term financial security.
The study found:
- Greater enrollment personalization: The number of employees who personalized their enrollment increased by 15 percent. Among those who personalized, the average contribution rate was 7.8 percent, compared to 3.4 percent for those who accepted auto-enrollment.
- Greater take-up of full company match: The enhancements resulted in a 19 percent increase in the share of employees who took advantage of the company’s full match benefit. This demonstrated how optimized enrollment design could actually increase the effectiveness of existing matching incentives.
- Greater plan savings and improved retirement security: The design changes also led to an increase in savings levels, boosting the average contribution rate by 62 basis points, or roughly 10 percent across all digital enrollees. That lift was equivalent to what one would expect from increasing the typical employer match by 62 percent.
“Because employees don’t often adjust their initial contribution rates after enrollment, these initial increases due to digital design can lead to meaningful improvements in long-run retirement security,” Benartzi said in a statement. “The most compelling result was the shift toward personalization.”
When people personalize their plan choices, he added, it suggests they’re being reflective and thinking about the best possible solutions for themselves, which he believes “is great news that digital design enhancements can help increase the percentage of people who personalize their savings decisions.”
This new evidence further suggests that by adjusting online enrollment architecture, employers have an opportunity to generate improvements that are similar to if they substantially increased their match program.
“When it comes to helping workers with their retirement security, the industry has historically focused on automatic enrollment and providing generous match incentives as the primary tools for moving them in a positive direction,” said Charlie Nelson, CEO of Retirement and Employee Benefits for Voya Financial. “While we should continue to apply these important strategies, this latest research suggests that making simple adjustments to website architecture presents another promising way to improve the choices of auto-enrolled workers—something that can be attractive to an employer that is not in a position to change its match level or plan design.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
