retirement plans: leveraging behavioral economics & … · retirement plans: leveraging...

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

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Give employees the flexibility to own the decision

and avoid feeling locked in.

Allow opt out at any time

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