Smart Digital Design can be used to improve retirement plan participation rates and participant savings rates. Enhancing a 403b or 401k plan via smart digital design improves voluntary enrollment and contribution rates, according to new research cited in Harvard Business Review.
Shlomo Benartzi, Professor of Behavioral Decision Making at UCLA’s Anderson School of Management and Saurabh Bhargava, Associate Professor of Economics at Carnegie Mellon University developed a working paper with Lynn Connell-Price, post-doctoral fellow in the Wharton Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania and Dr. Richard Mason at City, University of London. The researchers worked in concert with Voya Financial to explore how changes in the digital design of online enrollment interfaces could influence the initial contribution decisions of employees in 401(k) plans.
Behavioral finance research has been a key driver of plan design features such as automatic enrollment and automatic contribution escalation, so it’s not surprising that researchers are tapping into its potential to influence the design of online retirement plan enrollment platforms.
The research of Professor Benartzi et al included approximately 8,500 employees and a few hundred 401(k) plans. Before being automatically enrolled in the plan, the employees visited a standardized online enrollment interface to complete any one of three actions — actively confirm their enrollment at the default rate, personalize their enrollment at a different rate or decline enrollment altogether. To complete the task, the employees had to select from one of three horizontally arranged options. The goal was to prompt employees to consider a higher deferral rate than the default.
The researchers wanted to find out how significantly the design of the digital interface would impact the employees’ initial enrollment decisions, so they randomized employees to one of the two versions: Voya’s original commercial design, or an “enhanced” design that included three small changes:
- They changed the original color scheme of the options from a single color (orange) to a traffic light theme of green (personalize), yellow (confirm) and red (decline).
- They displayed the plan’s default rate on the enrollment screen, making it easier for workers to account for this information when making their elections.
- They simplified and standardized the language used to describe the alternatives, removing uninformative fine print and simplifying the headlines describing each option. For example, “I want to enroll with different choices” became “Do It Myself,” and “I don’t want to enroll” became “I Don’t Want to Save.”
Researchers found that, personalized enrollment rose by 15% — a nine percentage point increase from the baseline of 60%. The shift to personalized enrollment also increased savings rates; employees who personalize enrollment tend to contribute at a rate (7.8%) that’s twice as high as those who are automatically enrolled (3.4%). The researchers estimated that the design changes led to an increase in overall contributions equivalent to a 60% increase in the typical plan match. As they noted, making simple design tweaks to the online enrollment platform is significantly less costly for employers than offering additional matching contributions.
The findings from this latest research supports other studies that have been done in the field of digital design. All of the studies found that simple design changes to an online platform have had noteworthy impacts on users’ behaviors — from improving portfolio diversification to prompting employees to activate pension accounts in the U.K. to influencing how individuals choose health insurance and medical treatments in the U.S.
People have a tendency to underestimate the importance of digital design. However, as the researchers noted, it is more than a “prettifying” element — “it is an integral part of any product or service offering.”
They offer these five steps to create behaviorally informed designs:
- Gather behavioral insights on screen behavior, benefiting from the growing academic literature.
- Conduct 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.
- Test these new designs against carefully selected control conditions.
- Once a winning design is identified, scale it up, implementing across as many digital journeys as possible.
- Keep a searchable “results library” of all experiments.
Plan sponsors whose employees use an online platform for retirement plan enrollment — or any type of benefit enrollment, for that matter — should review the offering, and where applicable, discuss with their service providers the potential for modifying the digital design to help influence employee behaviors and prompt them make more effective and personalized decisions. As Professor Benartzi et al opined, “Design isn’t the garnish — it is often the key ingredient.”
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