Understanding Human Nature Can Facilitate Retirement Savings

Human nature affects behavior — including savings behavior. A recently released white paper argues that if employers and plan professionals understand human nature, they can better help employees’ saving rates improve — and that includes saving for retirement.

In the August 2018 white paper “The Road to Retirement Success: Strategies to Decode Human Nature and Improve Employee Savings,” the Empower Institute argues that people are more complicated than early economists believed, and that there are many factors in play in making financial decisions.

“Cognitive biases, emotions and long-standing habits often outweigh reason and, at worst, can wreak havoc on financial plans — particularly those that rely on long-term thinking related to future events such as retirement,” says that paper. However, the Empower Institute also finds rays of hope. “Fortunately, insights from behavioral finance can help us turn the quirks of the human brain to our advantage,” it says. “A growing body of knowledge,” it adds, “is helping people acknowledge and overcome these tendencies.”

The paper cites behavioral research findings that the positive or negative feelings specific events and new information evoke determines how people react to them. And it suggests that it is possible to overdo it in providing information that prompts a negative reaction, warning, “overly negative messaging or scare tactics can backfire. Rather than inspiring urgent action, they instead leave people overwhelmed with feelings of guilt and fear.” Instead, the paper argues, motivating people in a positive way would “go a long way toward encouraging good decision-making” — and making employees more confident that they can do a better job of saving.

The paper suggests that to encourage employees to save more money, employers can consider working with a plan provider that offers a digital participant experience that stresses positive choices more than the risks of not saving enough, and including personal success stories in the materials they distribute that promote the workplace savings plan.

“Above all,” argues the paper, plan sponsors, providers and features “can act as coaches and cheerleaders in efforts to bolster employee confidence in their ability to change their saving habits.”

“The more employees believe they can change, the more they will,” says the paper.