Q&A talks with Charlie Nelson, CEO of Retirement at Voya Financial, which recently launched the Behavioral Finance Institute for Innovation.
Q: Voya has launched the Voya Behavioral Finance Institute for Innovation. What is it and what does it hope to accomplish?
A: The Voya Behavioral Finance Institute for Innovation is our pioneering new research initiative. The Institute will be focused on gaining insights into the behaviors and decisions of Americans regarding their financial and retirement-planning activities, with the goal of creating large-scale solutions that can help people achieve better retirement outcomes.
One exciting aspect of our new Institute is that we will be approaching research much differently than how the financial industry does it today. Specifically, there are three key things that make it unique: 1) We will apply a scientific approach that incorporates testing, measurement and validation; 2) Everything is being done with a focus on improving outcomes for individuals; and 3) We will leverage the speed, scale and efficiency of the digital world.
We are working with a number of well-known behavioral economists, including professor Shlomo Benartzi, who is serving as a senior academic advisor for Voya. The Institute will support Voya across all of its businesses.
In our retirement business, we will look at driving improvements in savings rates and participation levels in plans, portfolio diversification, creating pathways to greater retirement income levels for participants, and reducing the number of participants who cash out their savings prematurely.
Q: As part of its launch, the Institute released its first white paper, "Using Decision Styles to Improve Financial Outcomes — Why Every Plan Needs a Retirement Check-Up." How do decision styles improve financial outcomes? Were their other findings from the white paper?
A: The first white paper from professor Benartzi looked at the two primary ways people make decisions — quickly and with little attention (instinctively) or more thoughtfully and with greater focus (reflectively). Through this decision pattern, we saw that people saved more if they paid attention and made decisions more reflectively.
Yet, according to our findings, roughly 90 percent of the plans we examined were characterized as "instinctive" — the average participant in those plans was not "on track" to replace at least 70 percent of their working income in retirement. We were able to determine decision styles by looking at people's online retirement plan activity — the time they spend on their plan's website, the information they gather and the trade-offs they make.
Through these findings we can make the following case — most retirement plan sponsors should be helping their members make course corrections with their savings strategy.
Q: One of the findings, according to Benartzi, is that retirement planning is seen as a one-time event but it needs to be a constant activity. How is that overcome? How can this be kept an ongoing activity?
A. While our first paper established the "why" behind the need to make adjustments and course corrections with one's retirement strategy, we also released a second supporting paper from ERISA law experts Fred Reish and Bruce Ashton, which provides the legal foundation for the "how" an employer that sponsors a retirement plan can help out.
The paper details five action steps that employers can leverage to create a more successful and healthy plan, while affording them with the necessary legal protection in their role as a fiduciary. These tactics include offering automatic plan enrollment; establishing more successful default investment options; setting effective employer matching levels; designing automatic saving escalation features; and conducting plan "re-enrollments" so that individuals can re-set an appropriate savings strategy.
Q: How has the field of behavioral finance, which applies psychological theories to finance, helped Americans achieve better outcomes?
A: Past research in this area has been very powerful, and has helped reduce some of the complexity and obstacles individuals face with their retirement-plan decisions. Some areas of study include the power of default options; overcoming the aversion to giving up something today for a benefit tomorrow; and the tendency for people to not take action on something complicated or difficult.
These insights have contributed to the development of innovative plan features and investment options such as auto-enrollment, auto-escalation and target-date funds.
Q. There's recent research that shows mobile use of the internet has surpassed desktop. Are people using apps for financial planning? Are people planning their retirement from their smartphones?
A. We live in an increasingly digital age of websites, mobile devices and apps. More Americans today are conducting their business online and with mobile. According to the Pew Research Center, in 2013 more than 50 percent of U.S. adults banked online and nearly one-third banked using their mobile phones. We see a growing opportunity to intersect behavioral finance research with digital insights to better understand how we can improve retirement plan engagement levels, especially when information is presented to us on screens.
Q. Why aren't people doing more about saving for retirement and savings in general?
A. Americans rely more than ever on workplace retirement-savings plans. These plans — initially designed as a supplemental form of savings — are now the principal way individuals save for retirement outside of Social Security.
Despite the successful foundation we've built in the private savings system, most people are not adequately preparing for retirement. Because of their voluntary nature, workplace plans require individuals to make a number of complex decisions — whether or not to participate, how much to save, what investments to make, and when and how much to withdraw during retirement.
In order to promote greater retirement security, workers need to participate in plans and increase the rates at which they save. As we look to the future, behavioral finance offers us even greater opportunity to improve outcomes.