Academic research in behavioural economics and psychology is changing how we understand our pension and benefit plan members’ decision-making process, and how we communicate with them. Popularized by the 2008 book Nudge: Improving decisions about health, wealth and happiness by Richard Thaler and Cass Sunstein, behavioural economics has been making huge advances—especially in the United Kingdom, where the Cabinet Office established a Behavioural Insights Team in 2010. (Janice Holman and I discuss how to get creative with DC communications by focusing on member behaviour in an upcoming article in the December issue of Benefits Canada.)
Often called the “Nudge Unit,” the Behavioural Insights Team applies lessons from behavioural science to public policy design and delivery—including everything from getting people to pay their taxes on time by informing them that most other people had already paid, to prompting them to insulate their attics through immediate rewards rather than long-term paybacks.
Read: Gaining momentum with auto features
Based largely on the success of the U.K. initiative, the field has been growing in leaps and bounds. Earlier this year, the U.K. Behavioural Insights Team established a partnership with the Behavioral Insights Group (BIG) at the Center for Public Leadership at Harvard’s Kennedy School of Government, which hosted a conference last month showcasing the latest research from around the world. New teams are cropping up everywhere from Israel to South Africa.
While Canada has yet to establish an official “nudge” unit, the government has started to incorporate behavioural economics into its policy development. Those who attended the 2014 National Financial Literacy Conference in Vancouver last week will be familiar with the subject, as it featured in many discussions.
Read: Getting plan members to take action
The idea of using behavioral science to help drive pension and benefit plan members to make good decisions is not entirely new. One of the best known examples of nudging or “choice architecture” increasingly common to plans is automatic enrolment. Instead of asking employees to opt in, you take advantage of their inherent tendency to inertia by enroling them automatically and allowing them to opt out if they choose. Research has shown that, once enroled, most members won’t make the effort to opt out.
Here are three more behavioural insights that have direct relevance to how your employees make decisions around pension and benefits:
- We are biased toward the status quo.
- We will often choose short-term gain over longer-term rewards.
- The threat of losing something is a far greater driver of behaviour than the prospect of gaining something.
How you might use these insights depends on your plan and member population. If you’re trying to drive down costs in your benefit plan through wellness, a month-long “get fit” contest with a prize at the end may improve results faster than would trying to explain to members the long-term benefit of exercise. Or, suppose some of your DC plan population has their money sitting in an outdated default option. You could try nudging them to move into the better fund option by letting them know how much money they’ve lost by not making the move earlier—rather than by illustrating how much they might make in the future by shifting their money.
Nudging raises valid ethical concerns about who’s doing the nudging and why—not to mention steering someone in a particular direction without their knowledge. But most experts agree that, handled properly, it can play a valuable role in helping people make better financial decisions—especially if it’s used in conjunction with a well-planned financial literacy program so members better understand their options now and in the future.