April 2, 2018 marks another Employee Benefits Day. It has been almost a decade since the International Foundation of Employee Benefit Plans (IFEBP) first introduced this special day for industry professionals. As per the IFEBP, it is a day to recognize trustees, administrators, benefits practitioners and professional advisors for their dedication to providing quality benefits and the important role they play in their colleagues' well-being.
The Theme of Behavioural Economics
This year, Employee Benefits Day brings attention to the topic of behavioural economics and driving better employee decision-making. Specific to benefits and financial wellness, understanding how social and emotional biases influence employees is a key learning tool for benefits and retirement planning practitioners.
In essence, the more that is known about behavioural economics and decision-making bias, the better positioned plan sponsors will be to develop and enhance plan designs that help employees improve their finance and health outcomes.
Addressing Irrational Decision-making
Although we'd like to believe that we all make sound and rational decisions, the reverse is often true. Yet, many benefits and retirement services practitioners craft communications as if those reading their messages have a keen interest as well as at least moderate to high knowledge of the subject. Experience, statistics and behaviour patterns show us that we have a greater tendency of making decisions like Homer Simpson rather than Albert Einstein.
If we want better results, it's time to take a closer look at how behavioural economics can help us. While it remains a relatively new science that marries psychology and economics, people's behaviour and inherent decision-making patterns have been fairly easy to predict over time. Yet we continue to make assumptions about employee actions that aren't correct. Although we might not like to believe it, it's more common than not for people to make decisions without considering if its actually in their best interest.
Unconscious Decision-making Bias
Over the years, I've written a great deal about saving for retirement, debt-management and the value of financial planning. As we unpack key elements of behavioural science, its important to examine the effects of unconscious decision-making bias. To help positively sway plan participant actions, here are some decision-making biases to pay attention to:
1) Choice Overload: if there are too many choices, it can stop one's decision-making ability and cause the employee to choose the default option.
2) Illusions of Control: People overestimate that their choice will generate a specific result. Example - if I buy a lottery ticket, I'm going to win. For savings and investment products, the plan member believes they will make better investment decisions on their own rather than with the help of an investment manager.
3) Inertia or Status Quo: People don't like change. The brain thinks of change as pain and seeks to avoid it. When it can't predict the outcome, the brain prefers the status quo as no change is a "reward" not a threat. For savings and investment products, this effect may show up as the decision to remain in the plan's default option.
4) Loss Aversion: People fear loss more than the potential for gain and may consider contributing to a pension plan with contributions taken from their pay seen as a takeaway rather than considering the upside of gaining employer contribution matching.
5) Unrealistic Optimism: This effect plays out when people believe that bad things happen to other people. They don't happen to them. Similar to the illusion of control bias, people believe that if they choose their investments, it will yield stronger outcomes because they are in control of making the investment choice.
Employee communication continues to be a barrier for positive plan results. Why not give consideration to the theories of behavioural decision-making and see if changes the actions employees take have a more favourable conclusion. So on my Resource Page, I've made available the following articles:
1) Stanford Center on Longevity: A toolkit series brief - 10 things you should know about psychological science and behavioural economics to improve financial and health outcomes with employees and customers and;
2) Stanford Center on Longevity: A toolkit series brief - The MORE Design.
3) Benefits Magazine: Designing and Communicating Retirement Plans for "Humans".
Beyond these applicable resources, we invite you to contact us to discuss ways we can apply behavioural economics to strengthen your benefit and retirement program goals. As always, we're here to help so that you can focus on what you do best.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.