Optimizing Plan Design: Balance sheet and Behavioral Approaches

1. Optimizing Plan Design:Balance sheet and Behavioral Approaches Jonathan Zinman Dartmouth College Academic Director, U.S. Household Finance Initiative, IPA DCIIA

2. Outline: 3 B’s for Plan Design Outcomes-based measurement • Whose outcomes? • Which outcomes? • The first “B”: household balance sheet Improving outcomes: behavioral approaches • Product/plan design • Product presentation • Ongoing communication • The 2nd & 3rd “B’s”: behavioral approaches beyond defaults

3. Outcomes-based measurement: Whose outcomes? DCIIA has (laudable) consumer/employee focus: “The primary role of defined contribution retirement plans is to create retirement income adequacy” How can we help DCIIA deliver? Three key assumptions underlying my approach • Delivering is trickier than DCIIA’s “core beliefs”, and most of the DC industry, allows • Behavioral insights can help deliver • And in doing so produce tangible benefits for plan sponsors and suppliers as well

4. Outcomes-based measurement: Which outcomes? • Challenge: “… create retirement income adequacy” when you touch but a fraction of the household balance sheet!

5. Fault with 401(k) Defaults? Elephant in the Room *Same psychology that moves 401(k) outcomes can spill over to other parts of balance sheet

6. Which Outcomes? DC may not be enough to “create retirement income adequacy” • Less laser-like focus on retirement assets • More focus on building net worth: on the full balance sheet • More focus on improving overall financial condition (and reducing stress)

7. More Holistic Outcome Measurement: How? Capturing data on the complete household financial picture is expensive, invasive… but we can get much of the way there • Credit reports (soft pulls) • Employee self-assessments of financial condition • Workplace outcomes • HR (distress) calls • Job performance • Retention

8. Plan Design for Better Balance Sheets: Behavioral Approaches • Lower-hanging approaches for improving existing plans • Seeing the forest: approaches for expanding scope of employee benefits for “financial wellness” • Not meant as purely altruistic approaches! • Behavioral households leave lots of money on table over their lifetime • Huge value in helping them reclaim that money • Workplace channel is advantageous • Caveat: these are approaches, not prescriptions • Thin evidence base for writing clear Rx’s

9. Behavioral Approaches at the Margins: Beyond Defaults Framing • Marketing for activation Decision aids • Is 401(k) right for you? Reminders and feedback • Re: plans, resources, pitfalls Product development • Commitment features

10. Behavioral Approaches: Adding Benefits, Adding Value Add benefits to add balance sheet scope • Advice/counseling at balance-sheet level • Online financial management apps • With feedback • Eventually with advice too • Employer-intermediated loans • Retention data, paycheck access should drive default rates and prices way down

11. Wrapping Up 3 B’s for Plan Design • Balance sheet • Build net worth, not just retirement assets • Behavioral approaches • Refine and add to plan design • Beyond defaults • Make them work better, safer • Avoid increased borrowing and negative returns Happy to talk more with anyone interested in applying and testing this approach