Plans Use Digital Nudges to Move Plan Participants Toward Retirement Goals

Plan sponsors and recordkeepers are rethinking how best to reach out to plan participants, both to provide necessary plan information and to help people save for retirement. Research from Cerulli Associates in their quarterly research release showed that while the biggest plans are already making the most significant investments in this area, it’s likely to become a more mainstream discussion as plan sponsors continue to struggle with gaps in coverage.

“It’s definitely a recent initiative,” David Kennedy, a senior analyst for retirement at Cerulli Associates, tells PLANSPONSOR. “Folks are still experimenting with the best way to consider redesign and incorporation of digital tools, but plan sponsors recognize the value.”

The advent of financial wellness programs might be pushing this conversation to the fore, Kennedy adds. “There’s a recognition that while financial wellness programs are meant to be helpful, they aren’t meaningfully increasing savings among participants. Part of that has to do with how these programs are designed,” he says. “When you log in to some of these programs, there are a bunch of PDFs and white papers, and it’s not a very engaging experience. Most people—unless they are really motivated—are not going to read a white paper. We are hearing that providers are thinking through other formats like quizzes or videos to get people interested.”

For plan sponsors that are considering a change, there is a growing body of academic research and experimentation outlining how to use digital tools and behavioral reframing to improve participation and savings.

Delivery matters

It’s not just PDFs and white papers that are a problem. Retirement solutions tend to go heavy on disclosure and light on engagement. Participants might get several types of paper-based disclosure in a given year that are legally necessary, but hard to place in context or even read. As a result, many people do not—especially if they arrive in paper format via regular mail.

Nicole Montgomery, a professor at the University of Virginia’s McIntire School of Commerce, has found that not only is direct mail not effective, but participants don’t like getting it. Older participants—Baby Boomers and Gen Xers—prefer getting plan communication in emails or via text message. Younger generations are also receptive to email and text messages, and they are also likely to use in-app communication.

“How information is delivered is important if you want to increase the chances of someone reading it,” Montgomery says. “The language needs to be easy to follow, and the communication itself needs to be relevant to the reader. The majority of communications in this context focus on what someone needs to do but don’t give clear-cut reasons why someone should do something or achievements that could be possible if someone saves. People are more likely to put off the future if they don’t feel a connection to it.”

Giving participants navigation tools can also be helpful. Punam Keller, a professor at Dartmouth College’s Tuck School of Business, notes that online portals or other digital tools often rely on navigation menus, which are only helpful if users already have a general idea of what they are looking for. “We have had success with showing recently asked questions or recently-searched-for topics in an application or portal, because it can create norms and help people navigate to the information they are looking for,” she explains.

Hypothetical scenarios can also be helpful. In one research project, Keller and her colleagues showed users several hypothetical people, each with a given set of life circumstances. Users could select the profile that most closely matched their situation and were pointed toward information relevant to their needs. In a retirement context, these generic profiles could be used to identify savings goals or other milestones on the financial journey of a particular type of person.

“We often expect individuals to have a clear picture of what they want or to know what they need to do, and that is not always the case,” Keller says. “It’s hard to get to the right questions or the right information if you’re starting from a very limited understanding.”

Reframing can help

Montgomery adds that using digital tools to help participants create proximal goals can improve participation. “Telling someone that they need to save $1 million for retirement doesn’t seem very achievable,” she says. “If you are sending an email that says you need to save X amount this year to stay on track or X amount this quarter, people can think through how to achieve that. When they succeed, they feel good about it, which creates positive associations and makes them believe saving is possible for them.”

Dan Ariely, a psychology and behavioral economics professor at Duke University, notes that people have a natural aversion to loss, and that aversion can be used to help them reframe savings. In one experiment, Ariely and his team looked at using pre-matching with digital engagement to get people thinking about savings on a monthly basis.

He explains it this way -“a company sends a notice to a participant and says ‘we have allocated up to $500 as a match to your contribution.’ If someone puts in only $300, the company will send a second notice saying ‘we have matched your $300 contribution and we are taking the remaining $200 back. This turned out to be very successful, because through the principle of loss aversion people are more motivated to guard against loss than they are to focus on gains.”

Using digital nudges or strategic communications to reframe how people think about retirement can also avoid common design traps that lead to things like a financial wellness portal full of untouched white papers.

“People tend to have funny intuitions about things,” Ariely says. “They think if someone just knew something is bad for them they would stop. Change is difficult. The reality is financial literacy doesn’t end up doing much, why? Because you can spend a long time learning a lot about finances, but then if you send people with four credit cards to the mall, the mall and the credit card are going to win.” 

Effective reframing can also help build trust and help participants get on a path toward long-term financial planning. Tim Rouse, executive director of the SPARK Institute, notes that there is a level of reticence among plan sponsors, participants, and advisers about how best to address these issues. “We have a lot of conversations around privacy,” Rouse says. “Participants may not want to put information about how much debt they carry into an app run by their employer, for example, even if it could help them figure out how to save,” he says.

Looking to third-party providers for tools can increase trust among participants, Rouse says, but that, too, will require a shift.

“Advisers already have a lot of these tools, but they don’t work with small-dollar accounts or they don’t think it’s going to lead to a long-term relationship, but that’s not always true,” Rouse says. “If someone gets used to using a tool, and then the tool tells them they qualify for advice, they are more likely to call the firm that’s offering the tool. Individuals want help managing their finances. If we remove some of the barriers to getting that help, that’s valuable.”