Last fall, the Nobel Prize in Economics was awarded to professor Richard Thaler for his work in the field of behavioral economics. His most accessible writings on this subject are “Nudge” and “Misbehaving.” Because the voluntary-enrollment process involves helping people make good decisions in a short period of time, all of us involved in enrollment are becoming behavioral economists. In honor of Thaler, the next few columns will focus on bringing behavioral science into enrollment.
Let's consider how we can shape or—to use Thaler's term—nudge prospects into voluntary participation. We'll consider six principles to help people make good decisions.
1. Reducing choice overload: We constantly look for ways to simplify choices during enrollment. At times, employers allow us to limit product selections, phasing in additional products over the year instead of all at once. This is ideal, but employers prefer offering all products on their benefit administration platform. Keep choices simple by recommending packages of products based on demographics, combined with answers to a handful of qualifying questions.
Another strategy is limiting choices within a product. If the guarantee issue for voluntary life insurance on a group is $150,000, we might only show choices of $50,000, $100,000, or $150,000. Another idea is to package critical illness, accident and hospital indemnity products as a medical insurance supplement plan.
2. Defaults: Employee enrollment is defaulted to at least the amount of savings the employer will match. This has been applied to products like disability income protection and life insurance, but can be complicated based on state laws regarding paycheck deductions.
While federal regulations encourage positive defaults in 401(k) plans, there are no regulations regarding income protection or life insurance. Maine encourages default enrollment for disability income protection, so this is an area to monitor.
3. Choice over time: People overlook long-term financial value in return for short-term financial gain. They also tend to be more optimistic about the future than they should be. Methods to overcome this include drawing attention to the outcome of decisions, emphasizing second-best options (indirectly drawing attention to the best option), and limited-time offers.
4. Partitioning options and attributes: This involves presenting options in categories versus listing specific products iteratively. An example would be packaging benefit options into “lifestyle options;” “legacy options;” “supplemental health options;” “event options;” and “income options.”
5. Avoiding attribute overload: Focus the attention of employees over age 50 on LTC or critical-illness features, while pointing younger workers toward extra benefits in the event of an accident.
6. Translating attributes: We often compare the cost of our products with a couple of lattes a week. Or we position the benefit almost like a lottery ticket: “For $8 a week, you could receive $1,000 a week for many years in the event of a disability—and your odds of becoming disabled during your working lifetime are much better than the odds you will get in a casino!”
Next month, we will continue this series by taking a look at influencing behavior during enrollment.
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