What Trustees Can Do to Simplify Financial Decisions€¦ · Gloria’s Glorious Blueberries stock...

The opinions expressed in this presentation are those of the speaker. The International Foundationdisclaims responsibility for views expressed and statements made by the program speakers.

What Trustees Can Do to Simplify Financial Decisions

James V. Bracchitta, CEBSLabor TrusteeScreen Actors Guild—ProducersPension and Health PlansNew York, New York

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Quick Survey . . .

1. How many years have you been in the benefits industry?a) 0-5b) 6-10c) 11-15d) 16+

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Quick Survey (continued)

2. How do you commute to work?a) Carb) Public Transitc) Bicycled) Walk/Other

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The following questions are primarily for those that commute by car, but if you drive please answer . . .

3. Are you safer than the average driver?a) Yesb) No

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4. Are you more alert than the average driver?a) Yesb) No

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5. Are you better at parallel parking than the average driver?a) Yesb) No

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How participants make decisions, and the plan design and communication tools that can help them make better decisions.

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What We’re Going to Talk About

I. How we (humans!) make financial decisions.II. The pension and health decisions participants need

to make.III. How plan design and communication tools can

help “nudge” participants toward good decisionsIV. Advice vs. EducationV. Two ethical dilemmasVI. Q&A and sharing success stories

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I. How We Make Decisions

What stops us from making good decisions?

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II. Decisions Participants Need to Make

GOOD DECISIONS/BAD DECISIONS

We often complain about participants not understanding their benefits…

But understanding is only part of the equation. More important is that they make good decisions!

Make the GOOD decisions EASY;make the BAD decisions HARD.

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CLASSICAL ECONOMICS says:People are rational agents who always make rational decisions in their own interest.

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Going to the theater . . .

$20 bill

$20 theater ticket

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Going to the Theater

On the way . . .

$20 bill

$20 theater ticket

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What if on the way . . .

$20 bill

$20 bill

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What if on the way . . .

$20 bill

$20 bill

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Is this a rational decision?

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Is this a rational decision?

LOST LOST

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Behavioral Economics

BEHAVIORAL ECONOMICS is a combination of the studies of psychology and economics which seeks to understand the social, cognitive and emotional biases that affect and influence economic decision making.

i.e., We don’t always behave rationally when making financial decisions.

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What stops us from making good decisions?

Being Human!

We’re bad at analyzing things statistically . . .

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How We Make Decisions: Problem #1

• A bat and a ball cost $1.10

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• A bat and a ball cost $1.10• The bat costs one dollar

more than the ball.

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• A bat and a ball cost $1.10• The bat costs one dollar more than the

ball.• How much does the ball cost?

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• If the ball costs $.10, then the bat costs $1.10—making the total $1.20

• The bat is one dollar MORE than the ball.• So the ball costs . . .

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Gotcha!

.05 Cents!

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• It takes 5 machines 5 minutes to make 5 widgets.

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• So how long does it take 100 machines to make 100 widgets?

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Each machine

makes

1 widget

in 5 minutes

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• So 100 machines make 100 widgets in

5 MINUTES!R02-28


2 Systems:System #1—intuitive, quick, not all that rationalSystem #2—slow, reflective, thoughtful

See: Daniel Kahneman: THINKING, FAST AND SLOW

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Behavioral economists have identified a number of factors (biases/heuristics) that people encounter when making decisions that can result in both

INACTIVITYand

SUB-PAR CHOICES

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Factors That Result in INACTIVITY and SUB-PAR

CHOICES

1. Loss aversion2. Hyperbolic discounting3. Overconfidence 4. Procrastination/inertia (status-quo bias) 5. Complexity/choice overload

(bounded rationality)6. Peer influence7. Disposition effect

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1. Loss Aversion

1) Loss aversionProspect Theory (developed by Kahneman and Tversky) says that we feel the pain of a loss far greater than we feel the satisfaction or pleasure of a gain.

So: getting people to forego present consumption for a future payment at a later date (say, retirement!) is incredibly difficult.

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1. Loss Aversion

Let’s go to Vegas!Which do you choose?

1) Get $900 for sureor

2) A 90% chance to get $1000

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1. Loss Aversion

Which do you choose?1) Lose $900 for sure

or2) A 90% chance to lose $1000

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1. Loss Aversion

What’s happening here?

In #1—Getting $900 for sure is better than even a 90% chance of getting $1000

But . . .

In #2—We take the gamble!

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1. Loss Aversion

What’s happening here?

In Problem #1 we are RISK-AVERSE. We take the sure thing.

In Problem #2 we are RISK-SEEKING. The sure loss is too much for us to bear.

In both we’re LOSS AVERSE!

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1. Loss Aversion

Back to Vegas . . .Problem #3In addition to whatever you own, you have been given $1000. Please choose one of the following options:

a) 50% chance to win $1000b) Get $500 for sure

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1. Loss Aversion

Problem #4In addition to whatever you own, you have been given $2000. Please choose one of the following options:

a) 50% chance to lose $1000b) Lose $500 for sure

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1. Loss Aversion

Let’s analyze a bit . . .

Most people opt for the SURE THING in #3 and take the GAMBLE in #4.

But the choices in both problems are identical:

$1500 $1500

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1. Loss Aversion

Problem #3

$1000 (START) + $500 (SURE THING) = $1500

Problem #4

$2000 (START) – $500 (SURE THING) = $1500

In fact, classical economics would say these are the same problem.

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1. Loss Aversion

But we know intuitively that they’re NOT the same problem!

What’s different?

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1. Loss Aversion

The reference point!

In #3, since you start with $1000, increasing your wealth to $1500 is A GAIN OF $500.

In #4, since you start with $2000, winding up with $1500 means you have to incur A LOSS OF $500.

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1. Loss Aversion

In short—We hate losing more than we like winning.

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2. Hyperbolic Discounting

1) Loss aversion

2) Hyperbolic discountingThe human tendency to focus on the short term rather than the long term. When faced with uncertainty, we reduce the importance of the future in our decision making.

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Which would you prefer?

$60 NOW

$50 NOW

OR

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More is better than less.

$60 NOW

$50 NOW

OR

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$60 NOW

$60 in one

monthOR

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Now is better than later.

$60 NOW

$60 in one

monthOR

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The tension comes when you’re faced with:

In order to realize a gain, one has to be patient.This is quite difficult!

$50 NOW

$60 in one

monthOR

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Patience seems to come when you add time to the equation:

Most people are willing to wait the extra 30 days when you push the problem into the future.

$50 in a year

$60 in 13

monthsOR

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But . . .In a year the problem is:

And we want our money NOW!

$50 now

$60 in a month

OR

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3. Overconfidence

1) Loss Aversion

2) Hyperbolic Discounting

3) Overconfidence (and self-rating)People tend to overvalue the traits in themselves that they think of as “good”—generosity, kindness, attractiveness.

They also overestimate their ability to pick good investments.

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3. Overconfidence

Let’s go back to our “Quick Survey”

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3. Overconfidence

Are you safer than the average driver?

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3. Overconfidence

Are you more alert than the averagedriver?

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3. Overconfidence

Are you a better at parallel parking thanthe average driver?

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3. Overconfidence: Lake Wobegone Effect

The Lake Wobegone Effect Coined by Professor David G. Meyers, for Garrison Keillor’s fictional town where “all the women are strong, all the men are good looking, and all the children . . . are above average.”

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4. Procrastination/Inertia

1) Loss aversion

2) Hyperbolic discounting

3) Overconfidence (and self-rating)

4) Procrastination, inertia and the status quo bias

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People have a tendency to delay making decisions, and once they delay making the decision, they have enormous trouble changing course.

STICKINESS . . .

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Inactivity in decision making tends to be“sticky.” Making a decision takes much more effort once you delay, defer or avoid it.

STICKINESS . . .

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This stickiness is sometimes called the STATUS QUO BIAS: the proclivity to prefer the status quo, or the prevailing condition.

This can be disastrous when an doesn’t take an employer match in a 401(k) plan: delay can carry a very high cost, especially considering the effects of compounding

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5. Complexity

1) Loss aversion



4) Procrastination/inertia (status quo bias)

5) Complexity/bounded rationality (choice overload)

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5. Complexity

Financial decisions—especially retirement decisions—are highly complex . . .

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5. Complexity

. . . and often made in an atmosphere of uncertainty.

We have to save, invest, plan, weigh competing factors, prioritize those factors, project trends, perform complicated computations, etc. Even if we want to plan effectively, it’s not at all easy.

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5. Complexity

Choice Overload: Often the set of choices we face (e.g., investment choices) are large and perplexing and lead to “analysis paralysis.”

Bounded Rationality: The odds against us making optimal choices under such conditions are formidable. Making complex decisions under uncertain circumstances challenges our intuitive sensibilities.

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6. Peer Influence

1) Loss aversion





6) Peer influence

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6. Peer Influence

A number of studies show that the choices ofour peers seem to have an effect on whetherwe choose to participate in retirement planofferings.

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7. Disposition Effect

1) Loss aversion





6) Peer influence

7) The disposition effect

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Imagine this scenario:You need money to cover the cost of your daughter’s wedding and have to sell some stock. Since you bought it, Gloria’s Glorious Blueberries stock has appreciated $5000. Another stock in your portfolio, Tomahawk Trucking, is worth $5000 less than when you bought it. Both stocks have been stable in recent weeks. Which are you more likely to sell?

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The Disposition Effect is the irrationalpropensity of investors to sell winners andkeep losers. Worse, investors will often put more money into a losing account!

Echoes of loss aversion: Avoiding the regret we would experience in recognizing a loss.

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It also can result in what’s called

The Sunk-Cost Fallacy

Assuming additional risk on top of the risk you’ve already taken.

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7. Disposition Effect/Sunk Cost Fallacy

Two avid hockey fans are going to drive 40 miles to see their favorite team. One of them paid for a ticket; the other was on the way to buy a ticket when—luckily—he got one free from a friend. On the night of the game there’s a terrible blizzard. Who’s more likely to brave the blizzard and go to the game?

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II. Decisions Participants Need to Make

• Pension– Defined Benefit

• How/When

– Defined Contribution• Deferral/Distribution

• Health– PPO/HMO/POS– HSA/FSA– In/Out of Network Care

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III. Tools That Can Help

So . . .How can we counter the pitfalls weencounter and help participants makegood choices?

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III. Tools That Can Help

1. Choice Architecture/Framing2. Stress Gains and Losses3. Tell Stories4. De-Jargonize!5. Peer Pressure/Social Norms6. Leverage Competition: Make a Game7. Assess your strategy

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1. Choice Architecture

Choice ArchitectureChoice architecture is the design of different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision-making.

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Using Choice Architecture to counter: Procrastination/Inertia

2 DC Plan Charts . . .

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Total Contribution in a DC Plan with a 50% Company Match up to 6% of Pay

Employee Deferral Company Match Total Contribution

0% 0% 0%

2% 1% 3%

4% 2% 6%

6% 3% 9%

8% 3% 11%

10% 3% 13%

12% 3% 15%

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1. Choice Architecture/Framing

Total Contribution in a DC Plan with a 50% Company Match up to 6% of Pay—REFRAMED

Employee Savings

Company Contribution

Total Contribution

Lost Company Match

12% 3% 15% 0%

10% 3% 13% 0%

8% 3% 11% 0%

6% 3% 9% 0%

4% 2% 6% 1%

2% 1% 3% 2%

0% 0% 0% 3%

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Total Contribution in a DC Plan with a 50% Company Match up to 6% of Pay—Also counters Loss Aversion

Employee Savings

Company Contribution

Total Contribution

Lost Company Match

12% 3% 15% 0%

10% 3% 13% 0%

8% 3% 11% 0%

6% 3% 9% 0%

4% 2% 6% 1%

2% 1% 3% 2%

0% 0% 0% 3%

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Other common Choice Architecturefeatures that counter Procrastination/Inertia Status Quo Bias:

1. Opt In/Opt Out2. Auto Enrollment3. Escalators

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Framing People react to a particular choice in different ways depending on how it’s presented. Presenting the same information in a different way often evokes different emotions.

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90% Fat Free!

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10% Fat!

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The Terrible Disease ProblemImagine the US is preparing for the outbreak of a terrible disease which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed:(A) If Program A is adopted, 200 people will be saved(B) If Program B is adopted, there is a ⅓ probability that

600 people will be saved, and a ⅔ probability that no one will be saved.

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The Terrible Disease ProblemImagine the US is preparing for the outbreak of a terrible disease which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed:(A) If Program A is adopted, 200 people will be saved(B) If Program B is adopted, there is a ⅓

probability that 600 people will be saved, and a ⅔ probability that no one will be saved.

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Same disease . . . different frame: (A1) If Program A1 is adopted, 400 people will die.(B1) If Program B1 is adopted, there is a ⅓ probability

that no one will die, and a ⅔ probability that 600 will die.

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Same disease . . . different frame . . . different choice!(A1) If Program A1 is adopted, 400 people will die.

(B1) If Program B1 is adopted, there is a ⅓ probability that no one will die, and a ⅔ probability that 600 will die.

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Keep in mind:Program A and Program A1 are identical

andProgram B and Program B2 are identical.

It’s the FRAME that’s different.

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2. Stress Gains and Losses

Stressing gains and losses can counter loss aversion.Loss frame:

DON’T LEAVE $ ON THE TABLE!YOU LOSE $X EVERY MONTH IF YOU

DON’T TAKE YOUR PLAN MATCH!

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Another “loss” frame:

Out-of-network doctors cost you $X% MORE than

in-network doctors.Let us help you

STAY IN-NETWORK!

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“Gain” frame:

How about a 5% pay increase? Take advantage of your retirement plan match!

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One more . . .

Would you rather pay your family or pay Uncle Sam?

Increase your retirement savings and cut your taxes. Let us show you how.

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3. Tell Stories

Tell Stories—Use Testimonials to counter peer influence and hyperbolic discounting

People connect with a narrative—especially if they can see themselves in it.

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3. Tell Stories

Our brains are wired to access STORIES not STATISTICS.

Think of how marketers use the scenarioof a “best friend giving advice.”

An example of how getting people to picture their retirement can counter hyperbolic discounting . . .

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3. Tell Stories: Joe Fed

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4. De-Jargonize

Getting the benefit-ese OUT of your materials can counter complexity/choice overload/bounded rationality.

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4. De-Jargonize

COMPLIANCE

vs.

COMMUNICATION

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4. De-Jargonize

This isn’t only a problem in benefits . . . lots of industries face the problem of communicating complex information.

Let’s take a quick commercial break.

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4. De-Jargonize

STAPLES RADIO :30 (2012)

In business, every day is a compromise between what you want and what your budget will allow. Face it. Compromise stinks.

But with Staples and HP, you don’t have to compromise your printing with no-name cartridges. Switch to original HP and get up to $30 in Staples Rewards. Just recycle up to 3 HP generic cartridges and buy HP ink or toner on the same day. That’s $10 in Rewards for each cartridge recycled.

Staples. That was easy.

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4. De-Jargonize

THAT WAS EASY?!

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5. Peer Pressure

Use peer pressure and social norms to counter peer influence and overconfidence . . .

People often tend to do what they think other people are doing because they fear making the wrong choice.

“Gimme a minute, I don’t want to make the wrong mistake.” (Yogi Berra)

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5. Peer Pressure

A message that looks like this might get results:

“87% of our employees contributed to their retirement plan last year.”

“9 out of every 10 drivers at our plant say YES to saving X% of their pay for retirement.”

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5. Peer Pressure

People are influencedby what they thinkis socially acceptable.

A typical street sign:

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5. Peer Pressure

Same message—but this sign usesour tendency to wantto think well of ourselves.

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6. Leverage Competition

To counter status quo bias, procrastination and inertia:

Gamification is everywhere: rewards programs, point systems, airline miles, etc. Use the people’s natural desire to compete to nudge them toward a good decision.

Make a game!

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6. Leverage Competition

My game idea . . .

Building a Bridge to Retirement Security (this is not how it looks in my head!)

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7. Assessing Strategy

Setting communication strategy is CIRCULAR:• Set goals and objectives• Develop a plan• Implement strategy• Get feedback• Refine and start again

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7. Assessing Strategy

If The Issue Is . . . Use . . .

Loss Aversion Stress Losses and Gains

Hyperbolic Discounting Tell a Story: Picture One’s Retirement

Overconfidence Social Norms/Peer Pressure/Access to an Advisor

Procrastination/Inertia Choice Architecture/Gamification

Choice Overload Limit Options/Choice Architecture

Complexity/Bounded Rationality Limit Choices/De-jargonize

Peer Influence Peer Pressure; Use Social Norms

Disposition Effect Provide Access to an Advisor

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7. Assessing Strategy: Using Communications that Work

What works and what doesn’t . . .

What Works . . . What Doesn’t . . .

Change orientation Crisis orientation

Personal stories and testimonials Facts and evidenceHelping people understand what it means to them

Telling people to change for the good of the company

Doing the math and making it simple

Using big numbers people can’t relate to

Appealing to the emotional impact of becoming healthier

Telling people to be better consumers

From Jennifer Benz, “Building a Strategic Plan for your Communications Program”, Benz Communications

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IV. Education vs. Advice

The question of LIABILITY.

Distinguishing between

EDUCATION and

ADVICE

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Laws that impact advice:• ERISA • Pension Protection Act (PPA) of 2006• Dodd-Frank• Investment Advisors Act of 1940

In a DC plan, providing advice is not mandatory, but many plans do it.

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Education: Helps participants learn about plan-related matters, like investment options, contributions, allocations, etc. Covers general topics such as: saving; retirement goals and objectives; understanding risk vs. return; financial wellness; etc.Important to understand that DOL Interpretive Bulletin 96-1, the PPA of 2006 (ERISA), Dodd-Frank DO NOT CONSIDER EDUCATION TO BE INVESTMENT ADVICE.

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Investment Advice:Makes specific recommendations to participants based on circumstances, needs, goal and related matters. Many providers of investment advice assume fiduciary status.

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Education vs. AdviceType Purpose How Delivered

Education Conveys Information

Website, Print, Seminars, Benefit Statements, Custom E-mails, etc.

Advice Recommends Specific Actions for a Participant to Take

Wide Variety, Ranging From Automated Services Through One-on-One Advice Arrangements

From: Society of Actuaries/Anna Rappaport Consulting

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If there’s a question about whether what you’re providing is education or advice—get help!

Your legal team can help with sorting out the regulatory environment (are there state regulations that impact your plan?) and in determining whether your educational tools are crossing the line into “investment advice.”

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V. Ethics

Two similar ethical dilemmas with opposite conclusions:1. A quick story from SAG-PPHP2. 2. Early retirement subsidy conundrum.

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IV. Ethics

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IV. Ethics (continued)

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Resources/Bibliography

Quiz questions are from: “Are All Minnesotans Above Average?” Science Friday, 11/6/2015 http://www.sciencefriday.com/segments/are-all-minnesotans-above-average/

Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011

Allen, Malone, et. al., Retirement Plans. New York: McGraw Hill 2014

Thaler, Richard. Nudge. New York

Koco, Linda: “Investment and Retirement Advice: A Guide for Employers” Society of Actuaries (soa.org)

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“How ‘Choice Architecture’ Can Strengthen Defined Contribution Plans” Spotlight, Sibson Consulting (November, 2013)

Benz, Jennifer: “Building a Strategic Plan for Your Communications Program” (IFEBP Benefit Communication and Technology Institute, July 18-19, 2016)

TED Talk: Dan Gilbert: Why We Make Bad Decisions (https://youtu.be/c-4flnuxNV4)

BRAIN GAMES (produced by National Geographic Television), available on Netflix. (http://www.imdb.com/title/tt2078690/)

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“Participant and Investment Decisions in a Retirement Plan: The Influence of Colleague’s Choices” (Duflo, Saez; May, 2000) See http://economics.mit.edu/files/728

Special thanks: Patricia A. Bonner, CEBS “Ten Ways Behavioral Economics Can Help Boost Retirement Security”

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Session #R02

What Trustees Can Do to Simplify Financial Decisions

• People have difficulty making financial decisions—especially complex decisions made in an atmosphere of uncertainty.

• Once we know why decisions are difficult, we can use plan design and communication tools to make the good decisions easy and the bad decisions hard.

• Simplify financial decisions for your participants by using:– Choice architecture; framing; stressing gains

and losses; using effective narratives; getting the jargon out; peer pressure and social norms; and leveraging competition.

Website Resourceshttp://blog.ifebp.org/index.php/debt-ridden-stressed-distracted-helping-employees-with-financial-educationhttps://www.ifebp.org/inforequest/ifebp/0167233.pdf

62nd Annual Employee Benefits ConferenceNovember 13-16, 2016Orlando, Florida

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2017 Educational ProgramsRetirement Security/Financial Education

63rd Annual Employee Benefits Conference October 22-25, 2017 Las Vegas, Nevadawww.ifebp.org/usannual

Certificate SeriesFebruary 27-March 4, 2017 Lake Buena Vista (Orlando), FloridaJuly 24-29, 2017 Denver, Coloradowww.ifebp.org/certificateseries

Related ReadingVisit one of the on-site Bookstore locations or see www.ifebp.org/bookstore for more books.

Ready or Not: Your Retirement Planning Guide, 43rd Edition Item #9067www.ifebp.org/books.asp?9067

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