Skip to main content

You are here

Advertisement

How Digital Enhancements Can Improve Retirement Outcomes

Practice Management
A review of recent research suggests that many 401(k) plan sponsors and providers are currently underestimating the power of digital design in helping participants make better retirement savings choices. 
 
Appearing in the Harvard Business Review, “How Digital Design Drives User Behavior” by Shlomo Benartzi, Professor of Behavioral Decision Making at UCLA Anderson School of Management, and Sarah Bhargava, Associate Professor of Economics at Carnegie Mellon University, reviews several recent studies substantiating that simple design enhancements to a retirement enrollment website can have profound results. 

Among the studies reviewed was their recent working paper, “Save(d) by Design,” written with Lynn Conell-Price at the University of Pennsylvania and Richard Mason at City, University of London, in collaboration with Voya Financial, that found that small digital changes can lead to improved results in terms of greater personalized enrollment, more employees taking advantage of the full company match, increased deferral rates and long-term financial security.
 
Benartzi and Bhargava explain that their research involved more than 8,500 employees across a few hundred plans, who prior to being automatically enrolled, had visited a standardized online enrollment interface to either actively confirm their enrollment at the default rate, personalize their enrollment at a different rate or decline enrollment altogether by selecting one of three horizontally arranged options. 
 
They studied the extent to which variation in the design of an online 401(k) enrollment interface would affect savings, with a goal of getting employees to consider a higher deferral rate.  
To understand the impact on these enrollment decisions, they randomized employees to one of two versions of the enrollment interface—the original commercial design or an “enhanced” design which incorporated changes in the color scheme of the options, displayed the plan’s default rate directly on the enrollment screen, and simplified the language and headlines used to describe each option. 
 
Notably, the behavioral economists found that simple design changes increased the rate of personalized enrollment by 15% or a nine-percentage point increase from a baseline of 60%. Employees who personalized their enrollment contributed at a rate of nearly 8%, twice as high as those who automatically enrolled at 3.4%. “Ultimately, we estimate that the design changes led to an increase in overall contributions equivalent to increasing the typical plan match by over 60%,” write Benartzi and Bhargava. 
 
Another experiment reviewed in the article that included Professor Richard Thaler of the University of Chicago Booth School of Business and Benartzi conducted on Morningstar.com asked two groups of subscribers to allocate their retirement savings among eight different funds. One group was presented with four blank lines with a highlighted link if people wanted to select additional funds, while the other group was presented with eight available lines.
 
Benartzi and Bhargava note that this might seem like a trivial change, but the research found that the precise number of lines impacted the level of diversification considerably. Only 10% of people shown four lines selected more than four funds, but that number quadrupled among those given eight lines. 
 
Administrator Awareness?
 
Benartzi and Bhargava further observe that, despite the growing evidence on the “potency of design,” many 401(k) administrators and HR executives underestimate the power of good digital design. Circling back to their earlier study, the economists note that, as part of the research, they surveyed several hundred 401(k) plan administrators and HR executives, asking them to predict how employees would respond to the tested design improvements, as well as which design changes would drive any employee response. 
 
According to the results, 88% of respondents underestimated the influence of design on enrollment, while only 12% were able to identify which of the three design changes most strongly drove changes to employee behavior. Moreover, those administrators and executives most confident about their forecasts were no more accurate than everyone else, they note.
 
“Too often, people see design as a visual garnish, a digital element that prettifies but adds little value. But this research shows that digital design is so much more than that—it is an integral part of any product or service offering,” write Benartzi and Bhargava. 
 
They note that actionable steps that can be taken to effectively employ digital design include: 
 
  • gathering behavioral insights on screen behavior;
  • conducting a “behavioral audit” of the existing digital designs, identifying gaps between the status quo and new designs that incorporate the latest insights on screen behavior;
  • testing these new designs against selected control conditions;
  • scaling it up once a winning design is identified; and 
  • keeping a searchable “results library” of all experiments.