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A 401k Fiduciary Must Know Where Gamification Fails in Encouraging Retirement Savings

A 401k Fiduciary Must Know Where Gamification Fails in Encouraging Retirement Savings
August 09
00:02 2016

Gamification has become an increasingly popular technique to influence behavior in positive ways. One of the best examples is the Fitbit – the fitness watch that tracks everything that has to do with fitness. In some cases, (like this reporter’s), it can also act almost like a Dick Tracy watch, notifying you when you receive a text or a telephone call. (Alas, while you can read the text and see who’s calling you, you still can’t talk through it.)

But forget about the phone part. It’s the fitness part that really exploits the advantages of gamification. The idea of making a game with a purpose goes back to Sir Baden Powell and his description of Boy Scouts. In modern times, it entails taking gaming elements and incorporating them into a “serious” system. In the case of the Fitbit, that serious system is fitness. The watch counts your steps, the number of stairs you climb, the hours you sleep, and any other number of activities that might impact your fitness (including you calorie intake). The “game” can be played against yourself (meeting goals you establish and that are pre-programed in the Fitbit). In addition, you can network with others wearing the Fitbit to play against them.

All in all, the Fitbit is a great example of utilizing the spirit of gamification for good use. For some time, there’s been an interest in applying those same techniques to the field of finance – specifically, retirement planning (see “Exclusive Interview: Gabe Zichermann on How Game-like Techniques Can Motivate Behavior,” FiduciaryNews.com, March 18, 2015). Last year, a handful of Ivy League researchers looked at one such gaming practice to determine its effectiveness. The results were unexpected.

Published in the June 2015 issue of The Journal of Finance, “The Effect of Providing Peer Information on Retirement Savings Decisions,” by John Beshears, James J. Choi, David Laibson, Brigette C. Madrian, and Katherine L. Milkman, the paper featured the results of a field experiment testing the impact of 401k savings behavior when participants are provided  information about peer behavior.

The idea might sound familiar. The theory suggests people will adopt a behavior if they believe that particular behavior is more common than other behaviors. It is currently being used by, according to the paper, at “approximately half of U.S. colleges in an effort to reduce student alcohol consumption.” Called “social norms marketing,” we might think of it as “peer pressure.” Others might refer to “social proof,” one of Robert Cialdini’s six principles of persuasive (see “What’s Really Wrong with 401k Employee/Trustee Education,” FiduciaryNews.com, October 7, 2014). In gamification terms, this would be the equivalent of the ubiquitous leader board – a measure of where you stand versus your peer group.

When you think about it, peer pressure represents just another form of bullying. It can be used to bully people into making poor choices (“C’mon, everyone smokes”). It can be used to bully people into making better decisions (“Four out of five dentists approve…”). Despite the all-too-familiar parental admonition regarding whether you’d jump in the lake if all your friends did, peer pressure has an impressive track record when it comes to influence.

Not only does academic research show the effectiveness of peer pressure in social situations, we are beginning to see research linking peer pressure to financial decision making, particularly when knowledge of peer behavior occurs naturally. Such research, including that conducted by Beshears, Choi, et al, is structured in such a way to allow researchers to measure the ability of peer pressure to influence decision making.

In designing their experiment, Beshears, Choi et al created two test groups based on their current savings rates – those who currently weren’t deferring any salary into the retirement plan and those who were deferring less than 6%. These two groups were then split into three groups, the first receiving peer information about peers within their five-year age range (e.g., 20-24 years old), the second receiving peer information about peers within their ten-year age range (e.g., 20-29 years old), and the third receiving no information on their peers. Moreover, the study was conducted in such a way that the participants were unaware of the experiment. This is called a “natural field experiment.”

When the results were tabulated, the answers suggested peer pressure not only might be ineffective in the area of retirement savings, it may actually be detrimental. For the employees who were already saving, peer pressure had virtually no significant impact. It was expected the group that was currently contributing nothing to their retirement plan would be the most positively influenced by peer pressure. In fact, such disclosure “significantly reduced the likelihood of subsequently enrolling in the plan by approximately one-third from 9.9% to 6.3%.” The researchers found this inverse effect occurred most prominently with employees who have comparatively lower incomes. Since this seemed to be a factor across all subgroups, the researchers suggest disclosing peer information discourages low income employees from participating because it reminds them of their lower relative status. They conclude “our results reveal an important drawback of highlighting the behavior of peers. Peer information inevitably contains an element of social comparison, and individuals with low status may react negatively to the information.”

How important is this conclusion? The trend towards gamification across all industries coincides with the rise of internet-based delivery systems. This is just as true for the retirement industry as it is with any other industry. The research highlighted in this article indicates what works for other industries might not work in the same way for retirement saving. Worse, it may actually produce undesired results.

James Choi, a co-author of the paper and Professor of Finance at the Yale School of Management, says, “In this social media age, there has been a growing fascination with using peer information to influence behavior. A number of financial companies have created online tools that let you compare your savings behavior with that of your peers. My sense is that these companies hope that these tools will motivate low savers to save more. But our research suggests that these interventions can backfire, causing low savers to save less. Even though peer information has been convincingly shown to encourage ‘good’ behavior in domains such as energy conservation, in domains like savings where accomplishment is closely tied to the sense of self-worth, peer information may discourage and demotivate, causing people to disengage and do less of the desired behavior.”

If companies using on-line retirement tools aren’t careful, they may just be allowing class action attorneys the opportunity to use the courts to further refine what it means to breach one’s fiduciary duty.

Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s (including information on the new wave of plan designs) every 401k plan sponsor and service provider wants and needs to know. Alternatively, would you like to help plan participants create better savings strategies? You can buy Mr. Carosa’s latest book Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort right now at your favorite on-line or neighborhood book store.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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