Behavioral Economics For Better Benefits Decisions
Easy hacks to guide your employees in the right direction
Posted on 06-26-2018, Read Time: Min
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Human resources, at its core, exists to support the organization as a whole by helping employees perform at their highest level. This support is provided through a wide range of activities: recruiting talent, helping employees make the right benefits decisions, providing professional and educational support, keeping employees engaged within the organization, providing performance guidance and feedback, creating and encouraging wellness initiatives - the list goes on and on.
However, what happens when employees in the company make the wrong choices?
What is Behavioral Economics?
Despite economists’ best efforts to define humans as ‘rational’ - this simply isn’t always the case. Humans are human, and we are perfectly capable of making bad choices, despite the potential repercussions. We overeat, we overspend, and we waste time on things that make us feel good but that aren’t always good for us.
Whoops.
“Benevolent persuasion”, “choice architecture”, “the nudge theory” - behavioral economics has several monikers. A fascinating and emerging field, behavioral economics combines psychology and economics to determine why people tend to make the wrong decisions and how to ‘nudge’ them to make better choices.
Whoops.
“Benevolent persuasion”, “choice architecture”, “the nudge theory” - behavioral economics has several monikers. A fascinating and emerging field, behavioral economics combines psychology and economics to determine why people tend to make the wrong decisions and how to ‘nudge’ them to make better choices.
The Current State of Benefits
Do any of these sound familiar?
“We offer a great 401(k) match program, but people still don’t participate.”
“Employees went back to their old ways after completing our wellness initiatives.”
“We can’t force people to participate - they have to want to do it.”
“We offer a great 401(k) match program, but people still don’t participate.”
“Employees went back to their old ways after completing our wellness initiatives.”
“We can’t force people to participate - they have to want to do it.”
If so, you’re not alone. HR teams of every size struggle to educate employees about benefits offerings and to keep employees fully engaged with programs.
Retirement Savings
In 2016, 28% of surveyed non-retired adults indicated that they currently have no retirement savings or pension. A more recent 2018 survey indicated that more than 60% of millennials have no money saved for retirement and that 51% of pre-retirees are behind schedule on their retirement savings. And, despite the fact that many adults struggle to save for retirement, there is also the challenge of savers cashing out accounts early or borrowing from accounts due to unforeseen financial difficulties, despite steep tax penalties.
Health Care Costs
The cost of health care is another ultimate driver for encouraging employees to make better benefits choice. Simply put, healthier employees cost less to insure and employ than employees in poor health.
But just how much does poor health cost?
A 2012 study indicated that poor health costs employers $576 billion (yes, billion with a ‘b’) per year. The study included expenses associated with the cost of sick days, lost productivity, and spending on medical bills. And, the cost is only going up, with large employers projected to see a 4.3% increase in health benefits in 2018. The average premium has risen almost 20% over the past 5 years, to $7,000 for single coverage in 2017 to nearly $20,000 for family coverage. And, out-of-pocket costs grew a staggering 66% between 2005 - 2015, which is more than twice the growth rate of wages during that same period.
On the flip side, the healthiest employees can cost companies significantly less in health care costs, as indicated by a recent South Florida study, which found that ‘healthy’ employees averaged only $4,300 in health care related costs, less than HALF of the $10,000 incurred by employees in poor health. *Source: Report on the Economic Well-Being of US Households in 2016 - May 2017
But just how much does poor health cost?
A 2012 study indicated that poor health costs employers $576 billion (yes, billion with a ‘b’) per year. The study included expenses associated with the cost of sick days, lost productivity, and spending on medical bills. And, the cost is only going up, with large employers projected to see a 4.3% increase in health benefits in 2018. The average premium has risen almost 20% over the past 5 years, to $7,000 for single coverage in 2017 to nearly $20,000 for family coverage. And, out-of-pocket costs grew a staggering 66% between 2005 - 2015, which is more than twice the growth rate of wages during that same period.
On the flip side, the healthiest employees can cost companies significantly less in health care costs, as indicated by a recent South Florida study, which found that ‘healthy’ employees averaged only $4,300 in health care related costs, less than HALF of the $10,000 incurred by employees in poor health. *Source: Report on the Economic Well-Being of US Households in 2016 - May 2017
Put Behavioral Economics to Work - 5 Simple Hacks
So how can your HR department apply behavioral economics to encourage employees to make better benefits decisions? There are several easy hacks that can help ‘nudge’ your employees in the right direction.
Framing
Think about how you are framing information and messaging related to your benefits and how that impacts your desired outcome. For example, to encourage a positive behavior, you might use social proof to showcase a ‘correct’ behavior.
“83% of your co-workers have completed open enrollment - what are you waiting for?”
Loss aversioncould also be used to nudge employees in the desired direction. The thought of losing something is twice as motivating as the thought of gaining something. So, consider highlighting negative outcomes versus touting positive outcomes, or using loss (or potential loss) as a motivator.See Also: Study - Loss Aversion & Employee Wellness
“83% of your co-workers have completed open enrollment - what are you waiting for?”
Loss aversioncould also be used to nudge employees in the desired direction. The thought of losing something is twice as motivating as the thought of gaining something. So, consider highlighting negative outcomes versus touting positive outcomes, or using loss (or potential loss) as a motivator.See Also: Study - Loss Aversion & Employee Wellness
Naming
Simple naming conventions can reposition plan options in a more positive light. Consider calling your “High Deductible Health Plan” option, which has a negative connotation, a “Smart Saver Health Plan”, “Consumer’s Choice Plan”, or something else with a more positive nuance.
Ordering
Listing the optimal plan first in your enrollment process will increase the likelihood of selection. Do you want to increase adoption of your high deductible health plan? If so, program that as the first option on the list of plans in your benefits shopping and enrollment software.
Auto Enrolling
Auto-enrolling employees in specific plans and programs with an opt-out feature is a new alternative to traditional opt-in plans. This is becoming a common practice with 401(k) enrollments.
Priming
Priming involves exposing people to relevant information or ideas prior to the actual decision-making process or task. For example, ask employees to set goals and make hypothetical plans for retirement prior to conversations and decisions related to 401(k) enrollment and contribution decisions.
Behavioral Economics in Action
All of this sounds great in theory, but does behavioral economics actually work? Survey says:Yes.
Engineering Health Food Choices
Google completely revamped their food program with built-in ‘nudges’ to help employees make healthier decisions. For example, research shows that people tend to fill their plate with the first item in a food buffet, so Google moved salad bars to the front of the line. Large food plates and to-go containers were swapped out with smaller plates to encourage portion control. Desserts were moved to a corner of the cafeteria and portions were downsized to reduce over-indulgence. Candy was removed from clear containers and placed in opaque bins to make them less visible.
The result?
During the experiment, the portion of total calories that employees consumed from candy dropped 9% and the total fat consumed from candy dropped 11%. When water bottles were moved to the front of refrigerators, employees consumed 47% more water than when there were on the bottom of shelves.
They key here is that Google did not remove the “good” (aka bad) food options or take away free food altogether, but rather re-engineered their offerings to make the right choices more accessible and appealing.
Learn More: How Google Optimized Healthy Office Snacks
The result?
During the experiment, the portion of total calories that employees consumed from candy dropped 9% and the total fat consumed from candy dropped 11%. When water bottles were moved to the front of refrigerators, employees consumed 47% more water than when there were on the bottom of shelves.
They key here is that Google did not remove the “good” (aka bad) food options or take away free food altogether, but rather re-engineered their offerings to make the right choices more accessible and appealing.
Learn More: How Google Optimized Healthy Office Snacks
Encouraging Honesty In Self-Report Forms
Does your company require employees to self-report data? A quick change in your reporting process can encourage and increase honesty, as noted in a 2012 insurance study. The experiment moved employee signatures for mileage reimbursement from the bottom of submission forms to the top of submission forms.
The result?
Employees who signed the top of the form reported 10.25% more mileage versus those who signed at the bottom of the form. Thus, the simple change in the signature location likely reduced the extent to which customers falsified mileage information in their own financial self-interest.
The result?
Employees who signed the top of the form reported 10.25% more mileage versus those who signed at the bottom of the form. Thus, the simple change in the signature location likely reduced the extent to which customers falsified mileage information in their own financial self-interest.
Opting-In Vs Opting-Out
Is there a positive behavior that you want to encourage? Consider implementing an opt-out program versus the traditional opt-in approach. This approach was studied in the context of 401(k) contributions, where employees were automatically opted-in to contribute with the option to opt-out. Standard economic theory speculates that automatic enrollment should make no difference to employee savings outcomes because it does not change the savings options faced by employees. However, the study showed that 401(k) participation rates rose 85% after automatic enrollment was initiated.
Better Benefits Through Behavioral Economics
These are just a few examples of how behavioral economics principles can be put to work to help create a better benefits experience for both employers and employees. HR professionals, the architects and managers of benefits programs, play a critical role within organizations. By applying proven behavioral economics principles and rethinking program structure and communications, HR can make benefits easier to understand, more effective, more efficient, and more ‘human’.
Author Bio
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Meisha Bochicchio works as the Content Marketing Manager for PlanSource. With over 20 years of benefits experience, PlanSource provides innovative technology solutions for a better HR experience
Visit www.plansource.comFollow @MarketingMeisha |
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