Benartzi: Digital Nudges Can Boost Retirement Savings
A recent analysis offers a fresh take on how to motivate individuals to save for retirement: wed technology and behavioral economics.
In “How Digital Tools and Behavioral Economics Will Save Retirement
,” an article published in the Harvard Business Review, Shlomo Benartzi, Professor of Behavioral Decision Making at UCLA Anderson School of Management, argues that technology can be used for more than providing individuals with information and a way to enroll in a plan and then monitor and manage their accounts. He suggests that it can be used to change behavior — specifically, that concerning saving. “Nudges can drive lasting behavior change,” Benzarti writes. “Digital nudging holds particular promise in the domain of retirement savings.”
Benartzi elaborates that digital nudging facilitates faster research and data regarding what interventions work with individuals. Further, he says, “the digital world offers unprecedented scale: by fixing a single website or app, we can potentially help millions of people make better financial decisions.”
Benartzi outlines three case studies to illustrate the impact digital nudging can have.
Effective Use of Email.
Benartzi discusses a paper he co-authored that concerned a study of the effect of an email intervention on enrollment in a savings program sent to roughly 800,000 military service members. They found that email can be used to dramatically increase enrollment. “This email used simple nudges, such as providing actionable steps for enrolling in the savings program and giving people clear examples of how small contributions can lead to large account balances, to make the responsible choice the easy choice,” he says. The results? Those in the study who received the emails enrolled at twice the rate of those who did not. Even more impressive was their finding that the effort was approximately 100 hundred times more cost-effective than other, broader means of increasing enrollment such as tax incentives and financial education programs.
Benartzi observes that the General Accounting Office reports that the percentage of U.S. workers who are not salaried — that is, self-employed, independent contractors, freelancers, part-time workers and other contingent workers — is climbing closer to half. And one of the many consequences, he argues, is that more workers are becoming solely responsible for their own retirement and financial well-being. “If we don’t provide them with easy digital tools for savings, we could be looking at a generation of workers struggling to achieve even a semblance of financial security in retirement,” Benartzi warns. “As a result, people need a digital solution,” he concludes, suggesting that these solutions should “directly and promptly links their savings to their income, even when that income appears inconsistently.” Plan sponsors “need to make it as easy for these workers to save as it is to spend,” he says.
Benartzi reports that he was one of the researchers in a study that examined the effect of a mobile app that offers account aggregation service that brings together all of your financial accounts and lets people track their investment performance and spending behavior on their mobile devices. They found that the app “had a huge impact” and cut monthly spending by the average user by almost 16%.
“The design of the digital world shapes our behavior in countless ways,” Benartzi notes. “The more we can do to understand the most positive uses of behavioral science combined with digital, the better off the world will be.”