Using A Behavioral Finance Principle To Encourage Employees To Save More
The match and the anchor
Employers can use a behavioral finance principle to encourage employees to save more seascape
It’s a constant challenge for employers: What methods actually result in employees saving more for retirement? One key tool is matching contributions, which both boost savings and give employees an added incentive to contribute to their retirement plan. Research from the Empower Institute shows that nearly three-quarters of workers who knew their match percentage set their contributions to meet or exceed it.1 Employers that leverage the power of matching contributions with behavioral finance principles such as anchoring can encourage employees to save even more — without increasing the amount they spend on funding the match.
How anchoring shapes our choices
The behavioral finance concept known as anchoring refers to people’s tendency to fix, or anchor, their financial decisions to a particular set point. You can think of the anchor as a kind of psychological benchmark. For example, imagine you’re in the market for a new car. You go to a dealership, pick out your preferred model and begin negotiations based on the sticker price listed on the window.
That sticker price serves as an anchor. If you end up paying 10% less than that number, you’ll feel as though you’ve gotten a good deal — even if the sticker price was inflated to begin with. In fact, we’re so attached to anchors that even one chosen at random has the ability to influence our decision-making.2
Anchoring bias can work against us — say, when an investor resists selling a stock until it hits a previous high price even if the market no longer supports that earlier valuation. But it can also work in our favor. Experts on dealmaking point out that the person who makes the initial offer — the person who sets the anchor point — has an advantage when it comes to negotiation. And raising the anchor point for a behavior you hope to encourage, such as contributing to a retirement plan or other savings vehicle, can encourage people to set aside more.
Putting anchoring into action
In setting a match percentage, employers set a benchmark for their employees’ thinking about retirement savings. Raising the match percentage also raises the psychological benchmark, which may help boost contribution levels. Employers can put this concept into action by simply restructuring their match formula. For instance, rather than matching 100% of every dollar saved up to 3% of an employee’s salary, an employer could match 50% of every dollar saved up to 6%. The company contribution remains the same — but employees in the second scenario will gain incentive to contribute 6%, potentially doubling the amount they save each year.
However, merely adopting a match at a higher percentage is not enough. For anchoring to work its behavioral finance magic, employees need to actually know what their employer’s match formula is. This part of the puzzle is often missing. According to Empower Institute research, nearly a quarter of employees are unaware of their employer’s match formula3 — and, correspondingly, are less likely to take full advantage of the match.
Harnessing the power of anchoring, then, takes two key steps. By raising the match percentage, an employer can set a higher anchor point for retirement contributions, encouraging employees to save more. And by creating a communication plan to help ensure employees know about the new, higher match, an employer helps ensure this new anchor point is firmly fixed in employees’ minds.
The Empower Institute is brought to you by Empower Retirement and critically examines investment theories, retirement strategies and assumptions. It suggests theories and changes for achieving better outcomes for employers, institutions, financial advisors and individual investors.
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1 Empower Institute, “Scoring the Progress of Retirement Savers,” April 2018.
2 Tversky, Amos and Daniel Kahneman, “Judgment under Uncertainty,” Science, 1974.
3 Shervin Assari, World Economic Forum, “Why do women live longer than men?” March 14, 2017.
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