Download A Tale of Two Nudges: Improving Financial Outcomes for Boomers

Generational Differences
A Tale of Two Nudges:
Improving Financial
Outcomes for Boomers
and Millennials
Designing benefits structures and advising employees across the spectrum of age cohorts present in the workplace
are challenging for both technical and social reasons. While millennials tend to have high levels of financial vulnerability, a number of the financial problems common to this generation can be addressed by program design with
product nudges. An example is autoenrollment in an employer’s retirement plan at a default contribution rate with
investment in the default option. Millennials also tend to be comfortable with the social and behavioral aspects of
nudging. In contrast, baby boomer finances are more idiosyncratic, making “one-size-fits-all” design and nudges
more problematic. Boomers also tend to be less open to employer-driven intrusions into their finances, especially as
they near retirement age. The more appropriate nudge for boomers is toward the use of objective advisory services.
by Conrad S. Ciccotello, Ph.D. | TIAA-CREF Institute and Paul J. Yakoboski, Ph.D. | TIAA-CREF Institute
R
esearch on the financial decision making of near-retirees and millennials provides an interesting opportunity to examine how the challenges inherent to benefits design and advising vary across age cohorts. 1 The
differences between millennials (also known as Gen Y) and
baby boomers span the technical, social and behavioral dimensions of advice and decision making. In this article, we
discuss these differences and the implications for those designing and implementing employee benefits and advisory
programs.
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We begin by outlining common technical issues with
millennials’ finances. Millennials are often quite vulnerable
financially, especially if they have high levels of debt. As to
technical matters, millennials tend to struggle with income
taxes, insurance and asset allocation. While these problems
can be severe, well-structured defaults and nudges in benefits
design can often address such issues and put millennials on
the path to a healthier financial future. By contrast, boomer
finances and financial issues are more heterogeneous. Having made good and/or poor financial decisions over a num-
generational differences
ber of years, near-retiree boomers tend to be very idiosyncratic. One-size-fits-all nudges and defaults are problematic
in the face of such heterogeneity.
The article discusses the social and behavioral issues of
benefits design and advice across age cohorts. While millennials typically do not seek advice proactively, they are relatively open to nudge and default policies and are influenced
greatly by peers. Millennials have grown up in a society
where privacy is less valued and social media contacts are
commonplace. Social interactions may reinforce that nudge
actions are good financial decisions, thus creating a cycle of
conforming to peers who do the same. In contrast, social
and behavioral issues are a greater challenge with boomers.
Privacy is more strongly valued by this cohort. Those near
retirement age tend not to trust employer-related advice
sources, fearing that there might be mixed motives behind
the advice. For these employees, hearing that “you have
enough money to retire” may be interpreted as meaning “we
want you to leave.”2
The article concludes with implications for employers and
advisors. The first is that well-designed defaults and nudges
can lead to a financially healthier employee population over
time, particularly for early-career individuals. Second, the
ability to segment advice delivery mechanisms across age
cohorts is valuable. Millennials’ relatively uniform financial
profile, plus their willingness to embrace modern communications tools, provides a scaling opportunity for advice. The
key is getting millennials to engage. In contrast, the combination of greater technical complexity with social and trust
issues makes advising the boomers a challenge. For this cohort, nudging toward individualized advice from a recognized objective source is important.
Technical Issues—Millennial Finances
De Bassa Scheresberg, Lusardi and Yakoboski observe
that millennials’ finances are often quite strained, especially
in the case where long-term debt, including student loans,
is present.3 Transitioning from dependent to independent
status has also been challenging for this cohort as many
were caught in the recession and its aftermath at the beginning of their careers. Once on their own and holding employee status, Ciccotello notes, millennials often struggle
with issues related to income taxes, insurance and asset allocation.4 While millennials’ finances are vulnerable overall, well-designed defaults and nudges can address many of
these challenges. This section discusses each of these areas
in turn.
Proper cash-flow management is a core element of good
financial health. Millennials often have too much income tax
withheld from their pay. While this creates a refund opportunity, it harms their finances as many suffer from low liquidity and often have high levels of both consumer and student
loan debt. Effectively, many millennials are making an interest-free loan to the federal government with each paycheck
while paying interest on credit cards and other debt.
The Tax Code in the United States is a byzantine creature,
but it offers opportunities for millennials who are beginning
careers as full-time employees. Millennials must understand
the levers in the Code, however. For example, they often do
not take advantage of the arbitrage available from having
both pre- and posttax health and retirement savings vehicles
available. As an entry-level person in a lower tax bracket,
posttax (Roth) vehicles are preferred. Millennials in higher
tax brackets would benefit from pretax vehicles, such as traditional 401(k) plans.
Nudges regarding income tax withholding would be
helpful to millennials. Benefits office communications on
overwithholding could help spur the individual to increase
the number of allowances claimed. With tax-deferred savings vehicles, the story is similar. Defaulting millennials into
retirement savings plans is a good strategy, as are nudges to
encourage full leveraging of employer matching contributions (such as setting default contribution rates equal to the
percent of salary matched). Providing the option of Roth
posttax contributions and communicating the advantages
of posttax contributions relative to pretax contributions is
also quite valuable. If a millennial is able to make a Roth
contribution while in the 0-15% marginal tax bracket, this
provides an excellent hedge against potential future tax rate
increases.
Millennials are often underinsured for both life and
long-term disability. Being young, they typically are healthy.
Absent the experience of a household where there was the
premature death or severe disability of a breadwinner or
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generational differences
caregiver, millennials often underestimate the probability of it happening
to them along with the financial implications. Millennials also often believe
that life and disability insurance premiums are unaffordable, a serious misperception given the low cost of life and
long-term disability in typical group
plans. They are also likely to assume
that any employer-provided coverage
is adequate, with no need to purchase
supplemental coverage.
Nudging millennials toward supplemental group life and long-term
disability insurance is sound strategy.
This includes parsing the differences
between life and disability needs.
Many millennials arguably have low
or no life insurance needs beyond a
standard benefit of $25,000 to $50,000
(e.g., single, no dependents, no bequest motives). Unfortunately, they
may equate the lack of life insurance
need with a lack of need for disability insurance. Being disabled is financially different than being dead. There
are costs for a disabled person’s care;
in addition, there are ongoing living
expenses that still must be covered in
the absence of earnings, such as mortgage or rent payments, food and utilities. Millennials’ finances often exhibit
wealth exchanges among generations.
Without disability insurance, the millennial may shift this financial risk to
brothers and sisters, parents or grandparents.
Millennials can make extreme and
inappropriate investment decisions in
their retirement savings plans, such as
allocating a disproportionate share of
their assets to conservative, low-risk in-
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vestment options such as money market funds. Review of individual data in
retirement plans shows that a number
of participants in their 20s and 30s have
an all-cash allocation.5 Such allocations
could be a choice the millennial made
due to uncertainty about market volatility or a lack of financial literacy. The
danger is that such an allocation will
stay in effect throughout the long period of accumulation.
Target-date retirement funds are an
appropriate investment default remedy.
Such funds place the individual in an
appropriate asset allocation dependent
upon expected year of retirement. Targeted communications to millennials
about extreme asset allocations is also a
good strategy, as the target-date default
may pertain only to new contributions,
but not existing assets.
Technical Issues—
Boomer Finances
Boomers, especially those nearing
normal retirement age, face a number
of the same financial decision-making
challenges as millennials. Boomer finances are more idiosyncratic, however—the result of many years of past
financial decisions (good or bad). In
addition, boomers may still be supporting millennial children as well as aged
parents. Alternatively, they could be
receiving support and/or expecting an
inheritance to address a financial need.
Simply looking at a boomer family balance sheet would not capture such contingent “liabilities” and “assets.” This
section examines where the variance
in appropriate technical advice tends to
increase with age, making defaults and
nudges toward a particular outcome
problematic. The progression is from
areas where millennial and boomer
issues are similar to those where they
tend to differ.
The Tax Code bedevils boomers
just like millennials. Overwithholding
income taxes is chronic in the United
States, regardless of age cohort. The
most powerful explanation given in
the literature is inertia.6 Boomers do
not update (increase) their allowances
when they are overwithholding. Similar to millennials, communications can
at least remind boomers of this situation and provide the means for them to
readily update their withholding.
Regarding insurance, many boomers still struggle with decisions regarding which risks to retain and which to
transfer. Nudging toward appropriate
life insurance coverage is more problematic with boomers, however, as
some may have grown assets sufficient
to offset life insurance needs, while
others may be far short. Financial support from or to children and/or aging
parents is another issue to consider in
determining life insurance needs. Also,
given health issues that tend to arise
with age, some boomers cannot be underwritten for reasonable cost, even in
a group plan. It is too late for them. As
for long-term disability, most boomer
middle-income and mass affluent employees probably should not retain this
risk, but underwriting may again be an
issue.
Asset allocation presents another
offshoot of the heterogeneity challenge.
For a boomer nearing retirement, a
wide range of equity exposure could be
generational differences
appropriate. For example, a 65-year-old could reasonably retain 100% equity exposure depending on other aspects of his
or her financial life. Or a near-retiree could reasonably have
the majority of his or her retirement assets in fixed income
instruments, as this employee might be holding equity assets
in ordinary accounts. Or it might be the case that the nearretiree has short-term spending plans postretirement and
does not want exposure to short-run volatility. Examining
individual asset allocation data from retirement plans reveals
that only about 30% of 60-year-old participants have stock
allocations within plus-or-minus 10% of the target-date fund
for their age.7 So, while a target-date fund would strike a balance between these two extremes with a balanced allocation
between stocks and bonds, it may not serve many boomers
particularly well.
Social and Behavioral Issues
Millennials’ life priorities vary from those of prior generations.8 They tend to value work-life balance and expect
fair social contracts. Relative to boomers, millennials also are
strongly influenced by reference groups such as friends, colleagues and co-workers. They rely heavily on these groups in
decision making.
Traditional marketing is not effective with millennials as
they do not believe the message is specifically for them.9 The
content of the message must be relevant, and the targeting
specific, in order to engage millennials. Millennials are heavy
users of online and digital communications tools, making
peer recommendations critical. Pew Research Center data
shows that 59% of Gen Y reported the Internet as their main
source of news, and 54% felt that new technology brings
them closer to friends and family. Almost 90% of millennials’ discussion of finances occurs in blogs and forums. Video
and gaming are also useful tools for millennial engagement,
with the latter having particular promise in matters related
to finance.
Boomers tend to share few of these social and behavioral characteristics with millennials. While some boomers
clearly are technologically savvy, most do not view personal
finances as a social matter. Boomers now nearing retirement have witnessed great changes in the workplace, best
captured by the move from a defined benefit to a defined
contribution culture. From a generational perspective,
boomers were caught in the risk shift in funding retirement consumption from employer to employee. Boomers
have also seen the labor market move from the expectation
of long-term employment to one of frequent job change
throughout a career. In the new environment, many boomers distrust employer-sponsored sources of advice. For example, Ciccotello finds that only 2% of a sample of those
nearing retirement age would be interested in help from an
employer-related source.10
Making the situation more complex for boomers is the
increased confounding of complex financial and behavioral
issues. Beyond the financial question of whether a boomer
can afford to retire, meaning-related issues are highly relevant to the question of whether to retire. Yakoboski observes
that over 80% of a sample of “reluctant” retirees enjoy their
work and feel fulfilled by it. Likewise, many believe they are
still effective at their job and that they would miss their colleagues if they left.11 Similarly, Lahey, Kim and Newman find
that “dissatisfaction with retirement” is the major reason that
those who have retired return to work.12
Implications for Benefits Design and Advice
Millennials
How can the challenges outlined regarding millennials be
addressed? Human resources (HR) leaders have noted several elements that are important to a successful millennialfocused strategy.13 At its core, any strategy should recognize
two points about Gen Y:
1. They tend to assume that if something is optional it
is not important. Examples in the financial context
include purchasing supplemental life insurance and
making discretionary contributions to a retirement
savings plan.
2. They typically are extrinsically motivated to make
financial decisions. Clear communications and relevance are highly important in the extrinsic motivation context.
In the employee onboarding process, electronic communications can be leveraged prior to the first day on the
job. After arrival, the attention of the new employee is much
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generational differences
more strained. Doing so is dependent
on a well-designed web interface that
allows new employees to not only enter necessary payroll information and
make benefits choices, but to access information necessary to do so and make
good choices in the process. As part of
this interface, the employer can provide
access to videos, calculators and interactive opportunities such as webinars.
This provides the opportunity for repetitive messaging on topics that may
be of particular relevance to the new
hire.
Subsequently, periodic communications through e-mail, print and
electronic newsletters can share key
messages, such as: Periodically increase your savings rate; manage your
accounts; meet with a financial advisor
to develop a savings plan; create a strategy for savings events and retirement.
Social media can be used to market
key messages on personal finances and
building financial well-being, such as
how to budget, stay out of debt and invest for retirement. Beyond this, social
media can be used to engage employees
with each other on personal finances.
For example, not only can Twitter be
used to send periodic tips and reminders on financial topics, but it can also
be used to host live interactive Twitter
chats on financial well-being. Google
Plus and Facebook can also be used
to similar ends. In addition, the employer’s intranet can be leveraged with
a financial well-being dashboard that
hosts links, apps, interactive tools and
calculators, podcasts, webinars and
blogs.
In all communication, informa-
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tion display is particularly important. User-friendly formats that avoid
dense blocks of text, reduce jargon, use
graphic elements to break up text and
show sequencing and relationships,
and highlight key pieces of information
are preferred.
Other tools that can be used to engage millennials include workshops
and forums with content experts and
partnerships with organizations that
can share expertise through a collaborative approach. In addition, millennials often are comfortable with
providing feedback on resources that
would be valuable and ways to improve
communications. Given their comfort
with the social aspects of finances, millennial employees also might welcome
service as “financial ambassadors” to
other early-career workers, encouraging them to enroll in the retirement
plan and take advantage of institutional resources by sharing their own
experiences.
Boomers
Boomers often are intrinsically motivated to act on financial matters, in
contrast to the extrinsic motivation
of millennials. Intrinsic motivation
derives from a change in life events.
So engagement for boomers is less of
a challenge, but finding a source for
trusted advice is more of a challenge.
Consider the retirement decision. The
boomer is likely to be highly motivated to understand the elements, both
financial and emotional. Finding a
trusted advisory source is the hurdle.
Employer-based sources have a perceived conflict of interest, at least at a
superficial level, and outside advisors
may not be able to serve the boomer if
the economics are not right. Ciccotello
argues for an advisory source that has
strong institutional awareness of the
individual’s workplace situation while
also having a reasonable distance from
the employer.14 Ciccotello, Pollock and
Yakoboski describe an example of incorporating a life planner element in
the retirement context for a large state
employer.15
Conclusion
Nudges come in different forms.
Some are product nudges, such as defaults in retirement plans. These put an
employee into a plan and into a specific
investment product. This type of nudge
suits millennials well for both technical
and social reasons. The challenge for
serving millennials is to build engagement. Defaults can jump-start good
financial decisions while engagement
is developed. Modern technology and
well-designed nudges can also help
build scale in the advisory function.
Millennials tend to be tech-savvy, digitally connected and socially engaged.
They trust the influence of peers and
family.
Other nudges are more subtle and may
encourage an employee to seek individualized advice. This type of nudge is a better fit for boomers. The issue for serving
boomers is improving access to trusted
advice. For boomers, nudges into specific
products are far less useful, and scale is
much more difficult to build. Nevertheless, nudges that provide an advisory portal deemed independent of the employer
can be effective in promoting trust. generational differences
Endnotes
1. Conrad S. Ciccotello, E. Jill Pollock and Paul J. Yakoboski, “Understanding the Reluctant Retiree on Campus: Helping Individuals Make the
Right Retirement Decision,” TIAA-CREF Institute Trends and Issues, July
2011; and Paul J. Yakoboski, “Engaging Early-Career Workers in their Financial Well-Being,” TIAA-CREF Institute Trends and Issues, October 2013.
2. Conrad S. Ciccotello, “A Nudge Too Far,” TIAA-CREF Institute
Trends and Issues, September 2013.
3. Carlo de Bassa Scheresberg, Annamaria Lusardi and Paul J. Yakoboski, “College-Educated Millennials: An Overview of Their Personal Finances,” joint report from the TIAA-CREF Institute and the Global Financial Literacy Excellence Center, February 2014.
4. See discussion by Ciccotello in Paul J. Yakoboski, “Engaging EarlyCareer Workers in their Financial Well-Being,” TIAA-CREF Institute Trends
and Issues, October 2013.
5. Conrad S. Ciccotello, “A Nudge Too Far,” TIAA-CREF Institute
Trends and Issues, September 2013.
6. Damon Jones, “Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds,” American Economic Journal: Economic Policy,
4(1), February 2012: 158–85.
7. Conrad S. Ciccotello, “A Nudge Too Far,” TIAA-CREF Institute
Trends and Issues, September 2013.
8. See discussion by Vitt in Paul J. Yakoboski, “Engaging Early-Career
Workers in their Financial Well-Being,” TIAA-CREF Institute Trends and
Issues, October 2013.
9. See discussion by Kopp in Paul J. Yakoboski, “Engaging Early-Career Workers in their Financial Well-Being,” TIAA-CREF Institute Trends
and Issues, October 2013.
10. Conrad S. Ciccotello, “A Nudge Too Far,” TIAA-CREF Institute
Trends and Issues, September 2013.
11. Paul J. Yakoboski, “Should I Stay or Should I Go? The Faculty Retirement Decision,” TIAA-CREF Institute Trends and Issues, December
2011.
12. K. E. Lahey, D. Kim and M. L. Newman, “Full retirement? An examination of factors that influence the decision to return to work,” Financial
Services Review (2006), 1-19.
13. See discussion by Rives, Saurer and Thomas in Paul J. Yakoboski,
“Engaging Early-Career Workers in their Financial Well-Being,” TIAACREF Institute Trends and Issues, October 2013.
14. Conrad S. Ciccotello, “A Nudge Too Far,” TIAA-CREF Institute
Trends and Issues, September 2013.
15. Conrad S. Ciccotello, E. Jill Pollock and Paul J. Yakoboski, “Understanding the Reluctant Retiree on Campus: Helping Individuals Make the
Right Retirement Decision,” TIAA-CREF Institute Trends and Issues, July
2011.
International Society of Certified Employee
Benefit Specialists
Reprinted from the Third Quarter 2014 issue of BENEFITS
QUARTERLY, published by the International Society of
Certified Employee Benefit Specialists. With the exception of
official Society announcements, the opinions given in articles
are those of the authors. The International Society of Certified
Employee Benefit Specialists disclaims responsibility for
views expressed and statements made in articles published.
No further transmission or electronic distribution of this
material is permitted without permission. Subscription
information can be found at iscebs.org.
AUTHORS
Conrad S. Ciccotello, Ph.D., is a research
fellow at the TIAA-CREF Institute and an
associate professor and director of wealth
management programs at the Robinson
College of Business at Georgia State
University. His primary research interests are in financial
intermediation and services. Ciccotello has more than 50
publications including articles in the Journal of Financial
Economics, Journal of Law and Economics, Journal of
Financial and Quantitative Analysis, and the Journal of
Corporation Law. In 2012, he became the executive director
of the Huebner Foundation, whose mission is to advance
university-level risk management and insurance scholarship and learning. Ciccotello earned a B.S. degree from
Lehigh University, an M.B.A. degree from St. Mary’s University, a J.D. degree from Suffolk University and a Ph.D. in
finance from Penn State University.
Paul Yakoboski, Ph.D., is a senior economist with the TIAA-CREF Institute. He conducts, manages and communicates research
on issues such as defined contribution (DC)
plan design, income and asset management
in retirement, individual decision making and preparation
for retirement, managing faculty retirement patterns, and
topics relevant to strategic management in higher education. He is responsible for the development and execution
of institute symposiums on such issues. Prior to joining
the TIAA-CREF Institute, he held positions as director of
research for the American Council of Life Insurers, senior
research associate with the Employee Benefit Research
Institute and senior economist with the U.S. Government
Accountability Office. Yakoboski earned his Ph.D. and M.A.
degrees in economics from the University of Rochester
in Rochester, New York and his B.S. degree in economics
from Virginia Tech in Blacksburg, Virginia.
©2014 International Society of Certified Employee
Benefit Specialists
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