Helping Users Plug the Leaks

Lindsay Juarez, Behavioral Research with Common Cents Lab and Irrational Labs

As a retirement program manager, one of your biggest hurdles is getting people to open and fund an account. Behavioral science and a careful look at human decision making can help overcome this first step. Using defaults can increase the proportion of employees enrolled in a program. Leveraging precommitments can help people overcome procrastination and keep contributions in line with inflation. These changes can shift participation by impressive amounts!

But once the money is in an account, how do you encourage savers to leave it there? The value of a retirement savings account is in its ability to grow quietly over time, undisturbed. Even tiny amounts of leakage, around 1.5%, compound into retirement savings that are 20% lower.

However, access to these funds can be a lifeline during emergencies. Balancing accessibility with long-term growth is an exercise in careful design and choice architecture. While many behavioral science interventions focus on making things easier for users and removing friction, here are three ways in which friction can actually benefit retirement plan savers.

Avoiding temptation

Out of sight, out of mind. It turns out that the most effective form of self-control is prevention: never seeing a temptation in the first place. Retirement account balances should not be pushed out to users for frequent monitoring, and the balance should not be folded into calculations of wealth that appear on primary banking dashboards. Keeping the balance behind a metaphorical door makes it harder to be tempted into a distribution, and it might also help users spend less in their daily life. When people feel wealthier, they spend more , and including retirement funds in one’s mental account could nudge their spending upward .

Asymmetric feedback

On the other hand, you don’t want people to never review their accounts or adjust contributions. Giving more personalized feedback to users based on their trajectories or in response to income changes can be an effective tool. When someone is making appropriate contributions, they should simply be told they are on track and given positive reinforcement to maintain the status quo. More specific guidance can be given to people who need to start or increase their contributions. This feedback could build on other behaviorally informed interventions, using careful social norm calibration  to compare contributions to that of their peers, or by asking people in a tiered series of prompts  to begin contributing at a future date. Because retirement savings needs are so idiosyncratic, feedback should be as well. 

Cooling off periods

People can make decisions in the moment that directly oppose their stated long-term goals: opting for low-brow comedies instead of the documentary they said they wanted , sharing a dubious news story on social media despite valuing accuracy, or spending too much money despite meaning to increase retirement contributions. One effective way to bring these in-the-moment choices in line with people’s long-term preferences is to enforce a pause or cooling off period .

Building in an intentional, prompted delay before finalizing a distribution means that people who need the distribution still have access but lets those who were feeling particularly panicked to cool off and explore other options. This might be as simple as creating a 24-hour pause after a distribution request or requiring a phone call with a plan advisor before approval. In all cases, it is important that the pause contain an additional prompt to the user so they can change their mind - a delay without the nudge might just feel like red tape.

Promising outcomes

Retirement plan administrators already design using some of these features with promising outcomes. The CARES Act in March 2020 opened up distribution eligibility in response to the COVID-19 pandemic. This new accessibility worried financial experts , but preliminary data suggests that coronavirus-related distributions (CRD) did not end up cannibalizing retirement accounts . The proportion of plan users taking a CRD ranged from 2-6%, and the median amounts reported were under $7,000, despite the $100,000 federal limit. At Ascensus, a Common Cents Lab partner that uses behavioral science in its plan design, 4.9% of plan participants took a CRD. While not causal evidence, we are happy that users were able to access this source of relief when they needed it without undermining their long-term goals.

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Lindsay Juarez is a behavioral researcher with Common Cents Lab and Irrational Labs, using behavioral science to create solutions that aim to increase the financial well-being for low- to moderate-income people living in the United States and abroad. Lindsay has a Ph.D. in social psychology and specializes in goal pursuit and self-control. The Common Cents Lab is funded by the MetLife Foundation and supported by BlackRock as part of BlackRock's Emergency Savings Initiative. For more information and to connect directly, you can reach Lindsay by email here.

This piece was featured in the September 22, 2022, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.