Putting Behavioral Finance to Work: Insights and Solutions for Better Retirement Outcomes

2019 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 research forum that focused on how common behavioral factors and biases affect retirement planning and financial decisions. These groundbreaking studies use principles of behavioral economics to examine how Americans make retirement-related decisions.

Date: June 19, 2019

Location: TIAA Headquarters, New York, NY

Featured Research

During the course of the day, we heard research presentations on the following studies:

Factors Affecting Temporal Discounting in Older Adults

Speaker: Joseph Kable, University of Pennsylvania

Key Findings:

■  Memory ability in older adults is associated with temporal discounting, even when controlling for age, gender and years of education.

■ People with mild cognitive impairment discount future outcomes to a greater degree than cognitively normal individuals.

■ Executive function (e.g., the ability to keep rules in mind during a task) is not associated with temporal discounting, but is associated with ability to maximize expected value in risky choices.


Kable graph


The Effect of Government Pensions on Financial Well-Being

Speaker: Bill Skimmyhorn, William & Mary

Key Findings:

■  There has been significant compliance with the regulation, which specified that employees hired before 1984 would remain in CSRS, while those hired subsequently would be enrolled in FERS.

■  Besides pension plan enrollment, other employee characteristics do not change sharply at the 1984 threshold.

■  Very few employees opted in to FERS during the initial open season in 1987; instead, they elected to stay with the traditional CSRS pension.

■  FERS coverage reduced consumer indebtedness by more than $11,000 in the long run, primarily via less mortgage debt.

■  FERS coverage had little effect on consumer credit scores.


Skimmyhorn graph


Decision Making under Uncertainty: An Experimental Study in Market Settings

Speaker: Federico Echenique, California Institute of Technology

Key Findings:

■ The vast majority of subjects do not conform with SEU theory.

■ Subjects exhibit similar responses to uncertainty generated by simulated low- and high-volatility stock prices.

■ The degree of compliance with the theory is very similar for undergraduate students, younger adults (20-39), middle-aged adults (40-59) and older subjects (60 or older).

■ Subjects with a high degree of financial literacy behave significantly closer to the theory, based on one of two financial literacy measures tested; but there is no significant relation with the second measure.

■ Subjects with more education are significantly closer to theory than less-educated subjects.


Echenigue graph


Debt Close to Retirement and Its Implications for Retirement Well-being

Speaker: Annamaria Lusardi, The George Washington University, TIAA Institute Fellow

Key Findings:

■ The most financially-knowledgeable older adults are the least likely to report that they hold too much debt or that they are financially fragile.
■ Older people with higher incomes and more education people tend to hold long-term debt, such as mortgages, while those with lower incomes and less education tend to carry high-cost debt, such as payday loans.
■ Short-term uncollateralized debt is strongly indicative of financial distress for older persons nearing retirement.
■ Older women and people with more dependent children are significantly more likely to report being over-indebted and unable to face financial emergencies.
Lusardi graph


White-Labels, Brands, and Trust: How Mutual Fund Labels Affect Retirement Portfolios

Speaker: Julie Agnew, William & Mary, TIAA Institute Fellow

Key Findings:

■ Participants allocate significantly more to trusted brands when choosing between otherwise equivalent investment options.
■ Options showing the names of highly trusted employers are more attractive to plan participants than equivalent white-label options.
■ Participants expect higher risk-adjusted returns and lower risk from options that display the name of a highly trusted brand or highly trusted employer.
Agnew graph


The Effect of Default Target Date Funds on Retirement Savings Allocations

Speaker: David P. Richardson, TIAA Institute

Key Findings:

■ Participants who had joined plans with a money market default largely switched out of the default option, had substantial variation in the equity exposure for their contributions, and, in 2012, allocated contributions to a median of three funds.
■ Those who had joined plans with target date defaults held a median of one fund, generally the default option, and had increased equity exposure relative to participants who joined plans with a money market default.
■ Target date defaults raised the amount participants contributed to equity by 13 percentage points on average and reduced or eliminated most allocation differences attributable to demographic variables.
■ With a money market default, the size of the investment menu had a slight effect on the number of funds in which participants invested; this effect vanished under target date defaults.
Rietz graph