Using Behavioral Finance to Drive Outcomes for Retirement Plan Participants

The retirement industry has long used a variety of metrics to measure the success of employer-sponsored retirement savings plans, including the percentage of eligible employees participating in a plan, how much they are saving, and how often they are engaging with their plan.

Voya Financial, a diversified financial services firm and plan provider, now looks beyond those metrics to measure success by participant outcomes rather than participant inputs. Using this standard, it seeks to ensure that everything it does boosts the percentage of pre-retirement income participants receive once they stop working.

This focus on outcomes is one of three fundamental underpinnings to Voya’s approach to using behavioral finance theory to help plan participants get more from their retirement plans, explained Jeff Cimini, head of retirement product for the company, during a presentation at the 2018 SVIA Spring Seminar in late April. The second is science; it seeks to make decisions about the products it offers based on rigorous, unbiased research. The third is digital technology, which it leverages both to test, measure and apply new initiatives more quickly, and to deliver faster, more cost-effective and more personalized service to plan participants.

Voya’s research in these areas, which has included partnering with renowned academics from leading universities, has led to some surprising findings. Among the highlights:

  • Higher automatic deferral rates don’t necessarily discourage plan participation rates. Many employers who automatically enroll employees in their defined contribution retirement plans set the employee’s default deferral rate at 3 percent of salary. They worry that higher deferral rates might prompt employees to opt out of the plan. In fact, Cimini said, Voya’s research, conducted with behavioral economist Shlomo Benartzi of UCLA, shows that opt-out rates don’t materially change until the default rate goes above 11 percent of salary.
  • Many retirement plan participants devote shockingly little time to engaging with their plans. During the enrollment process, Cimini said, participants typically spend less than a minute and a half deciding how they will invest their money. Meanwhile, a 10-year study found that 78 percent of participants never change their asset allocation mix or ongoing deferral rates.
  • Participant engagement trumps automation. Many plan sponsors have sought to improve participant outcomes by adopting design features such as auto enrollment, auto escalation of participant contributions, and the use of target-date funds as a default investment option. While all those features can help improve outcomes, Cimini said Voya has begun to see evidence that participants who engage with their plans enjoy better outcomes than those who leave it on autopilot. In one study, it looked at two distinct groups of plan participants within a pool of 5 million participants. The first group consisted of “instinctive” participants who were automatically enrolled in their plans, spent less than two minutes on their plan’s website, did not consider their retirement income, did not explore alternative savings rates, and were projected to replace less than 50 percent of their working income in retirement. The second group of “reflective” participants had enrolled in their plans 30 years ago, had logged into their accounts in the past year, and had explored their projected retirement income and the impact of different savings rates. Across all levels of income, Cimini said, “reflective” participants were on track to replace a higher percentage of their pre-retirement income in retirement. “We know it has a very positive impact if we can just get more participants engaged and out of the auto (mode),” Cimini said. “The autos provide a fantastic lift over zero … and get you to about 50 percent success rate. But they don’t get you to the full need, which we think is accomplished through engaging the participants in these programs.”
  • Language matters. When encouraging participants to save more for retirement, Voya now tries to frame the decision not as one that reduces current income but rather one that boosts retirement income. In fact, Voya has found that by reframing the enrollment decision as “purchasing future income” instead of “deducting money from my paycheck,” average deferral rates upon enrollment jump by two percentage points, to 7 percent from 5 percent.

Cimini said Voya has reshaped much of its participant communications activities to reflect the findings of its behavioral finance research. It’s also tried to combine behavioral finance theory with digital technology to make it easier for participants to realize improved outcomes from their retirement plans. When participants go to a Voya-managed plan website, for example, they land on a home page with a graphic depiction of how much of their income they’ll likely be able to replace in retirement. But they also see sliders linked to key factors that could impact that outcome, such as how much they’re saving, how much they expect their investments to earn, and when they plan to retire—all of which they can easily experiment with. Finally, to make it easy for them to take action that could improve their financial health in retirement, participants see a one-click “Make Change Now” button that will implement any changes that look appealing to them.