Designing behavioral prompts to improve saving decisions: Implications for retirement plans

Retirement plan sponsors, financial advisors, and public policy makers are increasingly interested in encouraging higher levels of retirement savings. This study enhances understanding of the behavioral biases that may adversely impact retirement savings decisions and financial outcomes and suggests mechanisms for improving outcomes. In an incentivized laboratory experiment, we study participants' investment and asset allocation decisions over a meaningful time horizon and test the efficacy of alternative behavioral prompts to motivate investment decisions. We find that greater financial literacy, higher levels of risk tolerance, and lower discount rates significantly increase levels of investment and expected return. Controlling for these factors, we find that behavioral prompts encouraging reflection on goals or on future needs have significant effects on allocation decisions and expected returns for young adults. We also find that the prompts increase expected returns for women and individuals with lower levels of financial literacy. These results suggest that behavioral prompts can be an effective method of improving retirement saving decisions, particularly for the less financially-literate.