WHAT DO RETIREMENT plans and science have to do with one another? The success of one can depend heavily on the other. Empirical evidence tells a compelling story.

Did you know that if you present the brain with a number and then ask it to make an estimate of something completely unrelated, it will base its estimate on the first number you presented? In the world of behavioral economics, this phenomenon is termed “anchoring” and it is just one example of the tricks the human mind plays when we make financial decisions. 

MassMutual continues to reach beyond our own experience working and communicating with employees into the realm of academic research in an effort to better understand how employees think and act related to their retirement plans. There is a science behind it. From our thought processes around buying a new computer, to the investments we choose for our retirement portfolios, behavioral economics has uncovered surprising facts about how people make decisions.

Research has found that “anchoring” or “the power of context” affects our thinking. How do you determine how much to spend on a new computer?  A common way is to compare prices.  If a store displays computers that cost around $2,000, a $1,000 computer feels like a good buy.  That same $1,000 computer can seem overpriced if it is found in a store that offers computers for under $500. 

What does anchoring have to do with a retirement plan? You may want to consider anchoring the default deferral amounts for your plans at a higher level! For example, many participants are not sure how much they should or can defer.  You can influence these decisions by providing good context information.  For example, by setting a higher default deferral (say, 7%), participants are more likely to settle on a higher default.  Even if they don’t elect to defer 7%, chances are they will end up higher than if the default rate was 3%. 

The example of anchoring illustrates just one of many ways behavioral economics research and plan design can work together to help put participants on the path to a more secure retirement.  Future articles in this series will delve further into the tendencies that hold participants back from making the rational decisions that are in their best interest with respect to their retirement saving. We’ll share the insights and some solutions behavioral economics offers to these problems and how MassMutual’s communication is designed to help overcome the behavioral roadblocks that inhibit saving. 

We look forward to sharing more behavioral economics insight, as well as MassMutual’s own learnings, during the “The Science of Saving” series. But, if you’d like to learn more about behavioral economics on your own, a good place to start is with Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the New Science of Behavioral Economics, by Gary Belsky and Thomas Gilovich (1999).

For more information on our behavioral research, or MassMutual products and services, please contact your local MassMutual representative or call 1-866-444-2601. You can also visit us at www.massmutual.com/powertogrow.

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