RETIREMENT PLANS:
LEVERAGING BEHAVIORAL ECONOMICS
& DATA ANALYTICS
MAY 22, 2018 ACTUARIES’ CLUB OF HARTFORD & SPRINGFIELD
AMANDA HUG, FSA, MAAA
Actuary, MassMutual
FELIX OKWANING, FSA, MAAA, EA, FCA
VP & Consulting Actuary, Prudential
ANDREW PORTER
Director of Behavioral Finance, Merrill Lynch
AGENDA
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BEHAVIORAL ECONOMICS BASICS & INSIGHTS
Amanda Hug
BEHAVIORAL ECONOMICS APPLICATIONS
Andrew Porter
DATA ANALYTICS
Felix Okwaning
WHAT IS BEHAVIORAL
ECONOMICS?
ECONOMICS PSYCHOLOGY
WHY THIS TOPIC?
“ECONS” Have the intelligence of Albert Einstein
Have an endless memory bank
Exhibit constant self-control
“HUMANS” Have trouble calculating the restaurant tip
Forget their anniversary
Gouge themselves at the all-you-can-eat buffet
SYSTEMATIC BIASES
ANCHORING
HOW LONG IS THE
MISSISSIPPI RIVER? “ “
RETIREMENT APPLICATION
WHEN SUGGESTING DEFERRAL RATES,
SUGGEST 5, 7, & 9% INSTEAD OF 3, 5, & 7%
LOSS AVERSION
RETIREMENT APPLICATION
MITIGATE THE FEELING OF LOSS BY SHOWING
RETURNS OVER A LONGER TIME HORIZON
INVESTOR BEHAVIOR
Source: DALBAR’s 23rd Annual Quantitative Analysis of Investor Behavior for period ended 12/30/2016
40 YEARS IN THE S&P 500
Source: S&P 500, Yahoo Finance
MENTAL ACCOUNTING
MENTAL ACCOUNTING
RETIREMENT APPLICATION
EMPLOYEES ARE LESS LIKELY TO SPEND MONEY
THAT THEY HAVE EARMARKED TOWARDS RETIREMENT
1986
2010
A DELUGE OF INFORMATION
A/B TESTING
A B
FOLLOWING INSIGHTS FROM
“THE SMARTER SCREEN”
BY SHLOMO BENARTZI
INSIGHT 1:
BEAUTY
MATTERS
$162
$327
INSIGHT 2:
POSITION
MATTERS
INSIGHT 3:
TIMING
MATTERS
BEHAVIORAL ECONOMICS:
PRACTICAL APPLICATIONS
ANDREW PORTER
Director of Behavioral Finance, Merrill Lynch
SAVE MORE TOMORROW™ Thaler & Benartzi, Journal of Political Economy, 2004, vol. 112
Approach employees well in advance of a pay raise
about increasing their contribution rates.
Ask in advance
Increase contribution rates in the first paycheck
after a pay raise to avoid a loss in take-home pay.
Timing Matters
Increase contribution rates with each raise until
reaching a preset maximum.
Increase over time
01
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03
Give employees the flexibility to own the decision
and avoid feeling locked in.
Allow opt out at any time
04
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