By Austin Baker
Welcome back to our discussion about behavioral economics and their implications on our open enrollment processes. For those just joining, we are profiling Richard Thaler’s book, “Nudge,” and specifically how his discoveries in behavioral economics can relate to open enrollment administration and decision-making architecture. In Part I, we talked about the challenges both administrators and employees face during open enrollment, as well as some of the biases and blunders that all of us encounter when making decisions, including anchoring, availability, optimism and overconfidence, fear of loss, and framing. In Part II, we will go deeper and discuss how structuring open enrollment in the context of choice architecture can improve outcomes for all involved.
“Nudge” outlines many opportunities and strategies to help make better, more informed decisions. But before we go deeper, let’s look at what research says about how working Americans make decisions during open enrollment. According to research by Guardian, 40% of workers said that a majority of their benefits came from their workplace, and 70% of those reported that they rely on their current workplace for 50% or more of their financial preparedness.
While putting open enrollment on “auto drive” may be attractive administratively, research indicates many employees are still not making the best choices about benefits. This means that they in turn do not have the best protection for themselves and their families. Less that 10% of employees update their workplace benefits during open enrollment and more than half of workers upon reflection say that their lack of attention to benefits “cost them money.” When surveyed, two-thirds of employees said that making sense out of their benefits is too complicated. Some 41 million Americans under age 65 are underinsured, with 56% of this population on employer-sponsored plans and the rest on ACA marketplaces or receiving Medicare disability benefits.
Considering more than 40% of American adults struggle financially according to Consumer Financial Protection Bureau, many times as the result of medical bills and treatment costs, it’s clear we have a large gap in helping meet the needs of working Americans through employer-sponsored benefits. Our experience shows that a combination of well-structured benefit offerings, smartly designed communications and value-based benefit counseling can help close the gap for many employees.
Let’s look more closely at some of the other areas in Thaler’s research including:
- Resisting Temptations
- Following the Herd
- Saving for Tomorrow
Resisting Mindless “Popcorn” Temptations
Temptations in our decision-making include “mindless choosing.” Mindless choosing is best illustrated in a research study cited in “Nudge” that involved feeding stale popcorn to unknowing moviegoers. The research subjects attending a movie were offered a free bucket of popcorn, secretly popped and stored for 5 days before serving to ensure that it was like eating styrofoam. Half of the group was offered a large bucket of free popcorn and the other a medium bucket of free popcorn. The research team found that all subjects agreed that the popcorn was awful, but the large bucket holders ate 53% more popcorn.
This demonstrates an all too common “path of least resistance” mindset that open enrollment communications and strategy has to overcome. All of us are inundated with messages and emails on top of our social media addictions. Helping employees overcome the easy and less thoughtful choice of just letting their past decisions ride is an art. Even getting full participation on a mandatory active enrollment is difficult. This begs for a more artfully designed communications strategy, one that nudges employees to ask questions and pause before mindlessly moving forward with their current choices.
Resisting “Bad” Mental Accounting Temptations
Everyone does math in their heads when making choices. Our benefits enrollment team has found that allocations are often misappropriated when enrollees weigh choices as complex as benefits and healthcare costs. The truth is that most people don’t know what questions to ask when making benefit choices, nor do they understand the cost and risk implications of decisions or indecisions. When more than 86% of employees struggle with defining a copay versus co-insurance, we have more work to do to close this gap. Research by Unum shows that more than half of employees are concerned about being able to pay their bills if they become disabled, but only about 26% of employees enroll in Long Term Disability.
Understanding the risks and financial implications of protecting your family for your particular stage of life is complicated. This problem begs for us to consider some nudge theories to create better models and communication strategies to reach our goal of building benefit packages that meet employees where they are. Employers need to engage with partners that understand and empathize with their employees’ challenges around making these impactful, far-reaching decisions. We also need to communicate the value that these benefits represent in a more meaningful way. Employees see their portion of the deductions every paycheck, for example, but over time they forget the employer’s often significant portion of contributions, not to mention the various underwriting and price benefits of accessing benefits on an employer-sponsored platform.
Following the Herd: The Spotlight and the Power of Conformity
Humans are easily nudged by others in their peer group, because we like to conform. This is especially true when we believe that others are watching. Time and time again, experiments show that people making anonymous choices act differently than when in groups. If people think that all eyes are on them, they will quickly fall into conformity with whatever consensus is framed in front of them most of the time.
Priming is an interesting phenomenon, as it relates to decision-making. Asking people if they intend to vote the day before an election can increase turnout as much as 25%, for example. Choice architects need to carefully consider questions and messaging to foster beneficial outcomes. With a host of negative implications, employees often turn to the person next to them during open enrollment, asking “What did you do?” As employers, we also cannot ignore the influencers in our organization. We need to prep our formal and informal leaders with smart talking points so we can help nudge the herd in the right direction as opposed to leading them off a cliff.
Saving for Tomorrow
Some 57% of Americans do not have enough cash to pay a $500 unexpected expense. How can employers help employees plan for retirement, increase their financial safety net, and purchase important employer-sponsored benefits that are right for them? It is a daunting task and one that we believe is very important to helping build a better workforce. But, we are seeing some promising practices including automatic enrollment, in which employees have to opt out rather than opt in. We also advocate for differentials in pay versus deduction frequency, where employers only take 24 deductions out of 26 paychecks and set up automatic saving sweep options for the other two pay periods.
Financial wellbeing is a foundational area that we need to address through smarter open enrollment practices. The question must be raised about internal versus external roles in achieving this goal and effectively nudging working American’s to help them make more informed decisions. Many HR executives will rightfully tell you that there is a line between informing versus counseling that should be respected so as to not create excess risk in the organization. This is where the right partner that is licensed and available to employees can help bridge this gap and protect the organization and the employee.
To Nudge or not to Nudge…
Whether we accept our role as choice architects or simply as order takers and payroll deduction administrators is fundamental. If we as employers set up poor choices for employees who most likely do not have good decision-making tools, then we must also accept the consequences. Equipped with modern research such as behavioral economics and decision theory, we must embrace a value-based “nudge” approach or be faced with the alternative which is well-cited in the statistics of this article. We are nudging working Americans whether we want to embrace it or be smart about it, so let’s be smarter about our open enrollments this season so the cycle doesn’t just mindlessly roll forward.
About the Author- Austin Baker is the President of HRO Partners a Human Resources Consulting, Managed Services and Technology Firm with an emphasis in Benefit Administration and Enrollment. HRO Partners is a fast-growing provider of Benefit Enrollment Solution that works with many strategic vendor partners. In the past year HRO Partners has saved their clients over 220 Million with their innovative benefit strategies and managed services deployments. Their team boasts more than a 96% average satisfaction score with employees and their clients. For more information, call Baker at 1-866-822-0123, visit www.hro-partners.com or connect with the company at www.facebook.com/hropartners, http://www.linkedin.com/in/jaustinbaker or http://twitter.com/jaustinbaker