A force for good: Using behavioral finance to improve retirement outcomes

2020 TIAA Institute Fellows Symposium

The TIAA Institute and the Pension Research Council/Boettner Center at Wharton School of the University of Pennsylvania co-hosted a Fellows Symposium to advance the understanding of behavioral factors and biases that can affect retirement security. New research was presented by leading scholars in the field of behavior finance. 

Date: June 25, 2020

Location: Held virtually

The following studies were presented at the symposium:


Featured Research

Using Behavioral Prompts to Improve Saving and Investment Decisions

Speaker: Jennifer Coats, Colorado State University

Key Findings:

■   Individual risk tolerance and discount rates each have a persistent and significant impact on saving and investment decisions. Financial literacy is also an important driver of investment decisions.
■   Higher levels of financial literacy, higher levels of risk tolerance, and lower discount rates increase the rate of saving and expected return.
■   Behavioral prompts that encourage reflection on goals and future needs have significant effects on allocation decisions and expected returns, after controlling for risk tolerance, discount rates, and financial literacy.
■   Behavioral prompts increase expected returns for women and people with lower levels of financial literacy.

participant pool

The Role of Affect and Social Norms in Preferences for Guaranteed Income Streams in Retirement 

Speaker: Suzanne B. Shu, UCLA

Key Findings:

■   While consumers appear to bring a lot of emotions and experiences around retirement financial planning to the annuity decision, making manipulation of affect and anxiety through messaging difficult, positive affect reliably predicts greater interest in annuity product uptake.
■   Using a high-social-norms framing significantly increases interest in life annuity products.
■   Individuals who are experiencing higher levels of financial distress, regardless of household income, report more interest in lifetime annuities.
■   Interventions and messaging that make better use of these factors may be able to help consumers make long-term financial decisions better aligned with their retirement goals.

colby shu positive affect annuity

Impact of Automatic Enrollment in Retirement Savings Plan for Public

Speaker: Robert Clark, North Carolina State University

Key Findings:

■   Career public employees covered by a pension and Social Security often receive at retirement a life annuity equal to 70%-80% of their final salary, so participation in supplemental retirement plans is generally low.
■   Before automatic enrollment, less than 3% of newly hired South Dakota government workers contributed to the SRP in their first year of employment.
■   After the state introduced automatic enrollment, over 90% of newly hired employees participated in the plan.
■   Automatic enrollment tends to equalize plan participation rates across age, gender, and income level. 
■   The typical South Dakota employee follows the usual pattern of remaining at the default contribution.

Clark Participation Graphic

Do Mandatory Retirement Contributions Crowd Out Voluntary Contributions?

Speaker: Leora Friedberg, University of Virginia 

Key Findings:

■   There is a small and often statistically insignificant reduction of 3-6 percentage points (pp) in the share of employees who make any voluntary contributions to the DC plan.
■   The reduction is modest in comparison to the 50% of employees who contributed more than zero but less than 5% before the policy change and thus are prone to be crowded out. 
■   Among those who continue to make voluntary contributions, such contributions dropped by about 2.25 pp. 
■   The resulting crowd-out rate is only about 45%, falling well short of predicted crowd-out of up to 5 pp.
■   The results suggest a high prevalence of passive saving and highlight the importance of salience in an increasingly complicated choice environment.

Friedberg Graphic Descriptive Stats

Moving the Goalposts

Speaker: Jordan Nickerson, Boston College 

Key Findings:

■   Workers who experience a reduction in retirement benefits are apt to delay retirement by about three months.
■   Such workers also are likely to increase their outstanding debt balances by roughly $1,600. The debt increase is due almost exclusively to an increase in auto-related debt and installment loans.
■   The additional debt may represent a worker’s attempt to make up for the delayed leisure of retirement by spending more on durable goods while still working.
■   While workers are likely to offset a reduction in benefits by working longer, the associated increase in debt may lead to lower consumption in retirement.

Nickerson Change in Years until retirement

Understanding Debt Among the Older Population

Speaker: Olivia S. Mitchell, University of Pennsylvania 

Key Findings:

■   Many older Americans believe their debt is excessive, feel financially distressed, are contacted by debt collectors, and are unsatisfied with their financial situation.
■   Many people close to retirement carry debt, including unpaid medical debt and student loans, and few older persons have given any thought 10 years previously to debt they might accrue today. 
■   Having dependent children contributes to feelings of being overindebted, as does having a negative income shock. 
■   Women, African Americans, and lower-income individuals are more financially stressed than their male, white, and higher-income counterparts.
■   Financial literacy contributes to positive financial perceptions and behaviors among older adults, including reporting better credit records and planning for retirement. 

Mitchell self-reported financial behaviors and perceptions