Money matters

MONEY MATTERS
Whilst some ‘autopilot’ initiatives such as auto-enrolment and auto-escalation in retirement savings - inspired by insights from behavioural science - have certainly had huge impacts and made leaps forward in basic participation in savings schemes, they ask nothing from individuals in terms of engagement.
This type of approach leverages what is known in behavioural science as a ‘System 1’ approach – when behaviour change is achieved by relying on our tendency towards inertia and settling for the status quo, and for choices and selections that require the least effort in both thought and action on our part.
In this scenario, an individual could be auto-enrolled into a pension in their current job, accept the default fund(s) and the default contribution rate (currently 2% in the UK, but increasing over time to an eventual 8% in 2019), but have very little understanding or engagement with their pension. Individuals might not even remember they are enrolled in a pension plan, let alone think about how to optimise it for their needs. And not consciously choosing to do something can result in a lower level of commitment and responsibility or ownership.
In the US, this lack of engagement also means that people are cashing out their retirement savings, not understanding how vital it is to keep these savings untouched. One in four households with a defined contribution fund cashes-out its savings, meaning that as much as $70 billion is withdrawn from 401(k)s on an annual basis.
Jonathan Rowson of the RSA summarises the issue succinctly: “Nudge changes the environment in such a way that people change their behaviour, but it doesn’t change people at any deeper level in terms of attitudes, values, motivations etc.” He and other social scientists still see the need for a more conscious, thoughtful engagement, which aims to “foster the transformative learning we need to make significant and enduring changes to our behaviour.”
With this in mind, some behavioural scientists and practitioners have been looking at ways to build greater and more sustained financial engagement with employees, so that they become more capable of managing their money for the future. This approach draws more on employees’ ‘System 2’ - their logical, rational thinking style - looking at how we might get them to consciously reflect on how they should best save for their future.
In this article, we discuss four simple, yet effective approaches that are building greater engagement with our finances, so that we are sufficiently prepared for the future. None involve any radical, costly changes - they are just tiny tweaks in how and when information is presented. Yet, all of them show promise.