1. OPTIMIZING PLAN DESIGN: BALANCE SHEET AND BEHAVIORAL APPROACHES DCIIA October 2012 JONATHAN ZINMAN Dartmouth College Academic Director, U.S. Household Finance Initiative, IPA

2. Outline: 3 B’s for Plan Design Outcomes-based measurement Whose outcomes? Which outcomes?  The first “B”: household balance sheet Improving outcomes: behavioral approaches Product/plan design Product presentation Ongoing communication  The 2 nd & 3rd “B’s”: behavioral approaches beyond defaults

3. Outcomes-based measurement: Whose outcomes? DCIIA has (laudable) consumer/employee focus: “The primary role of defined contribution retirement plans is to create retirement income adequacy” How can we help DCIIA deliver? Three key assumptions underlying my approach 1.Delivering is trickier than DCIIA’s “core beliefs”, and most of the DC industry, allows 2.Behavioral insights can help deliver 3.And in doing so produce tangible benefits for plan sponsors and suppliers as well

4. Outcomes-based measurement: Which outcomes? Challenge: “… create retirement income adequacy” when you touch but a fraction of the household balance sheet! Personal Balance Sheet AssetsLiabilities Deposit Accounts$6,102First Mortgage$170,400 CDs$3,783Second Mortgage$18,300 Stocks$4,983Vehicle Loans$5,242 Bonds$4,534Credit Cards$6,503 Mutual Funds$3,549Student Loans$12,987 IRAs$15,004Margin Loans$0 401(k)$32,765Payday Loans$0 Automobiles$12,186Other Installment Debt$3,210 Real Estate$220,800Other Lines of Credit$0 Other Property$14,222 Total Assets$317,928Total Liabilities$216,642 Net Worth$101,286

5. *Same psychology that moves 401(k) outcomes can spill over to other parts of balance sheet Employee unthinkingly contributes to 401(k) Employee unthinkingly keeps spending constant Employee borrows expensively to do so (credit cards, payday loans, etc) NET EFFECT: Lower net worth Less financial resiliency More small plan balances Fault with 401(k) Defaults? Elephant in the Room

6. Which Outcomes? DC may not be enough to “create retirement income adequacy” Less laser-like focus on retirement assets More focus on building net worth: on the full balance sheet More focus on improving overall financial condition (and reducing stress)

7. More Holistic Outcome Measurement: How? Capturing data on the complete household financial picture is expensive, invasive… but we can get much of the way there Credit reports (soft pulls) Employee self-assessments of financial condition Workplace outcomes  HR (distress) calls  Job performance  Retention

8. Plan Design for Better Balance Sheets: Behavioral Approaches Lower-hanging approaches for improving existing plans Seeing the forest: approaches for expanding scope of employee benefits for “financial wellness”  Not meant as purely altruistic approaches!  Behavioral households leave lots of money on table over their lifetime  Huge value in helping them reclaim that money  Workplace channel is advantageous Caveat: these are approaches, not prescriptions  Thin evidence base for writing clear Rx’s

9. Behavioral Approaches at the Margins: Beyond Defaults Framing Marketing for activation Decision aids Is 401(k) right for you? Reminders and feedback Re: plans, resources, pitfalls Product development Commitment features

10. Behavioral Approaches: Adding Benefits, Adding Value Add benefits to add balance sheet scope Advice/counseling at balance-sheet level Online financial management apps  With feedback  Eventually with advice too Employer-intermediated loans  Retention data, paycheck access should drive default rates and prices way down

11. Wrapping Up 3 B’s for Plan Design 1.Balance sheet  Build net worth, not just retirement assets 2.Behavioral approaches  Refine and add to plan design 3.Beyond defaults  Make them work better, safer  Avoid increased borrowing and negative returns Happy to talk more with anyone interested in applying and testing this approach