Delaying increased contributions to a retirement plan can actually boost retirement savings, but it all depends on how the delay is positioned.
As employer-sponsored savings vehicles like 401(k)s become a major source of retirement income for millions of Americans, personal biases can have an outsized impact on retirement security.
We conduct and analyze two large surveys of hypothetical annuitization choices. We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to a situation where annuitization is an “all or nothing” decision. Very few respondents choose declining real payout streams over flat or increasing real payout streams of equivalent expected present value. Highlighting the effects of inflation increases demand for cost of living adjustments. Frames that focus on flexibility, control, and investment risk significantly reduce annuitization.
Financial product ratings are intended to summarize relevant information in a manner that assists in decision-making, but may be harmful. Ratings are often assigned within categories; ratings across categories may not be comparable. We assess the effect of ratings in an experiment where subjects always have complete information about the characteristics of the investments, they repeatedly make investment decisions, and there is minimial computational burden. Although ratings supply no information, categorized ratings affect investment decisions and harm performance.
Given the widespread transition from defined benefit (DB) to defined contribution (DC) retirement plans, Americans increasingly face the challenge of assessing whether their saving behavior is likely to provide a secure retirement. Appropriate saving choices in one’s working years requires understanding how current saving choices translate into income in retirement, which requires a high level of financial sophistication.
Annuities are not popular despite providing valuable insurance against outliving one’s savings. The resistance to annuities is called the “annuitization puzzle.” We conducted and analyzed two large surveys asking Americans to make hypothetical annuitization choices in order to explore some of the factors that influence consumer attitudes toward annuitization, focusing on product design and how choices are presented (i.e., “framed”). We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to making an all-or-nothing annuitization decision.
A growing literature shows how consumers make mistakes in a variety of different settings pertinent to financial decision-making. Using data from a randomized experiment in Chile, we show how different ways of presenting pension management fees shape consumer choices, and how responses to pension fee information varies by level of financial literacy. Our results indicate that, in choosing pension funds, those with lower levels of education, income, and financial literacy rely more on employers, friends, and coworkers, than on fundamentals.
Advisors need to understand the way investors think about decisions and the process through which decisions are made. Evidence from experimental research in behavioral finance indicates that investors often have limited computational ability and/or limited attention implying that investors will have difficulty making optimal choices when information requires complex processing, such as aggregating risks across investments or time.
Despite agreement among experts that many consumers should place a high value on life annuities and related products that insure against longevity risk, few consumers voluntarily annuitize their retirement savings. This brief summarizes evidence that consumers’ aversion to annuities is not a fully rational phenomenon. Research finds that framing, i.e., how financial products are presented to consumers, can significantly affect respondents’ preferences among competing products.