Unlocking financial wellness: How behavioral finance can transform your company's savings plan

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Devin Miller
May 8, 2024

In theory, managing individual or household finances is easy. There’s an abundance of free information available that clearly outlines how to save money (spend less than you earn) and provides detailed tips about how to shift the balance from surviving until the next paycheck to building a cushion of savings.

In practice, human beings are complicated and driven by numerous variables that can’t be defined with a budget line item. Behavioral finance is a way of thinking about earning and spending money that accommodates the nuances of human emotions, wants, and needs that influence monetary choices.

And in the workplace, gaining a sense of how employees might be biased toward (or against) saving for an emergency is a key requirement for designing a workplace savings plan that actually accomplishes its goal: Empowering workers to bolster their financial health by consistently contributing to their savings. To build a savings plan that’s both useful and attractive, consider and incorporate these critical attributes of behavioral finance.

What’s a behavioral bias and why does it matter?

A behavioral bias is not an inherently bad thing. People generate and follow behavioral biases because they help clarify decision-making and increase efficiency. 

That said, there are some behavioral biases that can undermine financial decision-making in particular, and to design a savings plan that counterbalances these biases, you’ll first need to understand what they are and how they operate.

  • Endowment bias: This describes the natural tendency of humans to assign a higher value to an item or resource they already possess, and a lower value to an identical item or resource that they do not currently own. This bias can be even more pronounced for items that can’t be bought and sold on the open market (such as a savings account).
  • Loss aversion bias: The idea behind loss aversion bias is simply that losing something is more painful than gaining something. When it comes to savings accounts, employees might be more fixated on the amount they’re giving up in each paycheck instead of growing their savings.
  • Anchoring bias: First impressions matter, which is the crux of anchoring bias. It’s the inclination to believe the first piece of information heard, even if it’s thoroughly refuted later. If staff members are already disinclined to contribute to savings, then changing their opinion might be an uphill battle due to this bias.
  • Mental accounting bias: Whether we intend to or not, people sort their resources into different categories. This is why we are more likely to make frivolous purchases instead of investing in a savings account after an unexpected financial gain, such as a bonus. It feels like “free” or “extra” money.
  • Overconfidence bias: A fairly straightforward bias, this is the very natural habit of assuming that you know more than you truly do about something, whether that’s fantasy football or saving for the future. It could make employees less likely to pay attention to valuable financial education if they think they already know the basics.
  • Familiarity bias: Change is hard for humans, even though it’s unavoidable. Familiarity bias explains why people tend to go with the option they already know, even if it’s objectively worse than a new option.

Tailor program features to financial behavior and biases

So how can employers help their employees work around these biases to cultivate and build healthy financial behaviors? A good workplace savings program has built-in features that can support the goal of increasing savings, especially emergency savings.

One example is using program features to shape behavioral biases in ways that incentivize saving. For example, using automatic enrollment to register all workers in the savings plan (where it’s both possible and legal to do so) can circumvent anchoring bias and familiarity bias by streamlining the decision-making process. Contribution escalation is another feature that can help increase savings: It automatically deposits a portion of wage increases or even bonuses into savings, which can help undermine mental accounting bias and loss aversion bias.

Use ‘nudges’ to inspire savings growth

A “nudge” in behavioral economics is not quite equivalent to an elbow in the ribs; it’s closer to a whisper in the ear. The idea behind nudging is to create an environment that encourages the option you want to implement while discouraging options that are contrary to your goal. In other words, make it easy to save, and slightly more difficult to choose not to save.

Some ways that nudging can help employees increase their emergency savings could include:

  • Automatic opt-in: This isn’t possible in every workplace, but wherever it is possible, enrolling employees in a savings program as the default option can be powerful.
  • Hands-off contributions: Giving savers the ability to deposit money directly from their pay is another great prompt to use; it creates a smooth system that employees can set once and then ignore.
  • Gamification techniques: Can saving money ever be fun? Possibly! Make it easy for employees to track their progress, give them “badges” or other fun extras for achieving certain benchmarks, offer bonuses for savers who reach their goals, and create mini-competitions that reward the highest savers with some extra cash.

How gentle ‘peer pressure’ can boost savings

Peer comparison and trying to keep up with social norms often work against saving money; for example, people might feel pressure to upgrade their car before they can afford it. Gamification works because people like to compete with each other, and you can use peer comparison to your advantage, especially when crafting a program with loss aversion bias in mind: There should be nothing to lose but potentially something to gain by participating.

An interdepartmental peer-to-peer savings challenge can be made even more effective with leaderboards that help people (or departments) keep track of which person or group is ahead. Company-wide standing leaderboards might show who’s saved the most overall, who’s saved the most relative to their earnings, and who’s increased their savings the most.

Leverage behavioral finance in company communications

Anchoring bias and overconfidence bias are heavily based on what people think they know. Educating employees about the benefits of saving for an emergency, then explaining the steps for how to start and the importance of consistency, can give them a valuable foundation of information that will encourage savings-based habits and behaviors.

First, endeavor to build financial literacy materials that clearly explain the benefits of saving for an emergency and the differences between different methods of saving. While it’s important to mention the financial programs available during employee onboarding, it’s also wise to assume that new employees are inundated with information and might not fully retain all of the details about the nuances of employer-based emergency savings versus a traditional retirement plan.

So create educational materials that are easily accessible and that outline the benefits of saving for an emergency, including using stories from fellow employees (if you can) that explain how emergency savings helped them solve a financial problem. Offer simple and transparent documentation that shows how different savings accounts can accomplish different goals, as well as how employees can register for these resources.

Make education and feedback part of the savings process

Performance evaluations are so widespread these days that it’s rare to find an employer that doesn’t offer regular (at least annual) feedback around how well employees are meeting expectations and where there’s room for improvement. This is beneficial for employers because it helps set benchmarks for pay increases and promotions — and it’s also a critical part of employee development.

If we use the same philosophy with employee savings, it becomes clear that workers could benefit from:

  • Initial training around how to get started
  • Ongoing coaching to help keep them on track
  • Regular progress reports to keep them motivated
  • Rewards for reaching savings milestones

Don’t overlook the training and coaching components! They can be scaled by bucketing employees into groups that align with their level of financial literacy, and many employees will appreciate getting clear and relevant financial education from an entity they trust — their workplace.

Overcome psychological barriers by working with (not against) biases

Loss aversion, anchoring, and overconfidence are part of human nature, and by understanding and working with these inherent behavioral finance biases instead of against them, employers can construct financial literacy resources and savings programs that encourage saving money. 

Educating workforces about the importance of saving for an emergency, normalizing emergency savings in the workplace through gamification and nudges, providing transparent insight into progress through leaderboards, and providing ongoing support and information about how to become more financially literate are all ways to give employees new anchors, help them reassess their current level of knowledge, and make saving feel more like a gain than a loss.

Even though people aren’t always rational when it comes to money, it’s possible to design savings programs that use their existing biases to establish new habits and behaviors. When employers understand the “whys” behind behavioral finance, they can create an environment that supports and applauds staff for their new (or improved) financial skills.

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Devin Miller

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