What are they thinking?! Mapping the Mindset of the Retirement ConsumerExploring the Interconnected...

What are they thinking?!

Mapping the Mindset of the Retirement Consumer—Exploring the Interconnected Emotional Pathways that Affect Investing

C11-0516-023R (05/11)

About the Presenter

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MENU SLIDE

• MENU SLIDE

The Retirement Environment

The Retirement Environment

Psychology, Logic, Life & Investing

Psychology, Logic, Life & Investing

Using Behavioral Finance to Change Behavior

Using Behavioral Finance to Change Behavior

What’s it all mean?What’s it all mean?

Open ForumOpen Forum

I. II. III. IV. V.

THE RETIREMENT ENVIRONMENT

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SECTION I

How we think people think

MYTH:•Planning is rational

•Investment decisions are based in fact

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Planning and investment decisions are driven by emotions.

Planning and investment decisions are driven by emotions.

FACT:

The Retirement Environment

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17% decline in general public covered by a Pension Plan

Pensions have been cut.Pensions have been cut.

1979 to 1998:

12% increase in employees

offered DC Plan

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The Retirement Environment (cont.)

??WHY?

Personal savings plans grow•Defined Contribution (DC) Plans

•IRAs

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The Retirement Environment (cont.)

• Economic Crisis

• Headlines and Scrutiny

• Legislator Attention

• “New Normal”

??WHY?

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Behavioral Finance

Emotion and inclinations drive actions.

BEHAVIORAL

FINANCE

PSYCHOLOGY, LOGIC, LIFE & INVESTING

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SECTION II

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Hyperbolic Discounting

A show of hands…

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Hyperbolic Discounting (cont)

Get something now…

… at the expense having something else

in the future.

Procrastination.Procrastination.

RESULT:

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Procrastination

Common excuses to put off saving for retirement:• When I get a raise

• Retirement is too far away

• A few weeks or days, or even a year won’t make much difference

• I’ll catch up later

• I’ll sign up when I have time

• I can’t afford it right now

• I’m too busy

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Price of Procrastination

This chart is hypothetical and not intended to reflect the performance of any particular investment. It reflects the growth of an investment of $60 per month for 40 years, at 6% average annual return. If the investment were made in a tax-deferred vehicle such as an employer’s 401(k), 403(b) or 457 plan taxes would be due upon withdrawal at the investor’s current tax rate.

The $115,000 Coffee HabitHypothetical Tax-Deferred Growth

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Loss Aversion

The fear of losing:• Family

• Friends

• Health

• Home

• Physical attributes

• Status

• Possessions

• Freedom

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The fear of poverty

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Hierarchy of Fears

Source: “Imagine That” Affective Communications Study, co-sponsored by ING, not yet released. Data is based on a 2008 online Money Magazine survey.

I cannot afford to live in my house and must sell it to live somewhere less expensive

I cannot afford living expenses and need to ask my children for financial support

I cannot afford to pay for a very expensive medical procedure for myself or my spouse

I cannot afford living expenses and need to ask my children for financial support

49%

24%

17%

10%

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Familiarity Bias

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Familiarity Bias (cont)

• Inferior asset allocation

• Too much allocation to one or a few stocks

• Preferences for local stocks or industries

• Preferences for cultural proximity

• Preferences for professional proximity (i.e., a doctor investing in medical stocks)*

Source: “Mind on my Money,”

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Information and Change Overload

“The amount of information a human being consumed in the 18th century in his whole life –

is the same as a week of information in a regular newspaper.”

“The amount of information a human being consumed in the 18th century in his whole life –

is the same as a week of information in a regular newspaper.”

“Evolution and Information Overload,” wordpress.com, Design / Marketing / Philosophy, March 27, 2010

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Too Much Information

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Too Much Information (cont)

Another show of hands…

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Choice and Control

“too much choice

(can leave us)

bewildered and

depressed.”

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Lack of Control

“WORK STRESS AND HEALTH: the Whitehall II Study” Public and Commercial Services Union on behalf of the Council of Civil Service Unions / Cabinet Office, © 2004. Source of data: Bosma, H., Peter, R. Siegrist, J. and Marmot, M.G. (1998). Two alternative job stress models and the risk of coronary heart disease. Am. J. Publ. Hlth. 1998;88: 68-74.

0

0.5

1

1.5

2

2.5

High Job Control Intermediate Job Control

Low Job Control

Likelihood of Coronary Heart Disease

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Choice and Control offered by Retirement Plans

* “The Hearts and Minds of Retirement Investors,” ING North America Insurance Corporation, ©2009, Top-box score of “Very Important”

Relative Importance of Various Employer-Sponsored Retirement Plan Features*

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Self Comparison

{ AVERAGE }

DriverDriver

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Self-Comparison (cont)

DriverDriver

DriverDriver

DriverDriver

DriverDriverDriverDriver

DriverDriver

DriverDriver

AwareAware

Aware

Aware

Aware

Aware

Aware

Aware

Aware

Aware

Aware

Aware

SkillsSkills

SkillsSkills

SkillsSkills SkillsSkills

SkillsSkills

SkillsSkills

SkillsSkills

SkillsSkills

DriverDriver

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Self-Comparison (cont)

{ AVERAGE }DriverDriver

DriverDriver

DriverDriver

DriverDriver

DriverDriver

DriverDriver

DriverDriver

AwareAware

Aware

Aware

AwareAware

Aware

Aware

Aware

Aware

Aware

Aware

SkillsSkills

SkillsSkills

SkillsSkills

SkillsSkills

SkillsSkills

SkillsSkills

SkillsSkills

SkillsSkills

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Optimism Bias

Most – if not all – individuals want to define themselves in favorable terms:

• People are more alike than they think

• What people believe about themselves, or what they would like to believe, doesn’t vary much from person to person

• Each person is convinced that he or she is unique

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Social Comparison

• 80% of drivers think they are above average drivers

• 94% of professors believe their work is above average

• 99% of students believe they’re above average in getting along with others

• Most Americans believe they’ll earn above average income in the future

• The majority of CEOs think their companies will thrive more than their average industry competitors

USING BEHAVIORAL FINANCE TOCHANGE BEHAVIOR

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SECTION III

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Using Behavioral Finance to Change Behavior

How can this

knowledge of human bias, behavior and impulses

help us to encourage consumers to take action to build a

more secure retirement for themselves?

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Automatic DC plan features

Auto enroll and contribution increases•Consumer retains control; can opt out

•Avoid conscious decision to sacrifice

•Reduces information overload

•Eliminates procrastination and inertia

•Provides immediate gain

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Information Design / Choice Architecture

• Design

• Information Layering

• Plain English

• Choice presentation

Helping investors navigate information, options and decisions

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Asset-allocated investment options

• Managed Accounts

• Target Date Funds

• Asset Allocation funds

Removes the burdens of information and choice overload

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Tools and engagement devices

• Risk assessment tools

• Calculators

• Online education and account access

Enable positive saving action

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Breakthrough

Using peer comparison to improve retirement behavior.Using peer comparison to

improve retirement behavior.

Breakthrough:

“Test” of Concept

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Resulting behavior - take action!

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Social Media

INGCompareMe.com

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The Personal Approach

Source: “Working with an Advisor: Improved Retirement Savings, Financial Knowledge and Retirement Confidence!” ING North America Insurance Corporation, © 2010

Have you spent time working with a financial advisor to discuss your investments or plan your financial future?*

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The Personal Approach (cont)

Source: “Working with an Advisor: Improved Retirement Savings, Financial Knowledge and Retirement Confidence!” ING North America Insurance Corporation, © 2010

People who spend time with an advisor have more saved for retirement

Spent time with advisor?Spent time with advisor?

NoYes, but onlyonce or twice

Yes, some timeYes, a lot

of time

3x

1.5x

2x

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The Personal Approach (cont)

Source: “Working with an Advisor: Improved Retirement Savings, Financial Knowledge and Retirement Confidence!” ING North America Insurance Corporation, © 2010

People who spend time with an advisor are more likely to be moderate investors *

People who spend less time with a financial advisor are more likely to be conservative investors

People who spend more time with a financial advisor are more likely to be moderate investors

There is little difference in aggressive investors

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The Personal Approach (cont)

Source: “Working with an Advisor: Improved Retirement Savings, Financial Knowledge and Retirement Confidence!” ING North America Insurance Corporation, © 2010

Increased time with an advisor increases financial knowledge and retirement confidence*

Investment Knowledge Compared to Peers

0%

10%

20%

30%

40%

50%

60%

No time Once or twice Some time A lot of time

Less than

Same as

More than

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The Personal Approach (cont)

Source: “Working with an Advisor: Improved Retirement Savings, Financial Knowledge and Retirement Confidence!” ING North America Insurance Corporation, © 2010

Those with an advisor feel confident about retirement

No

34%

Yes, a lotof time

62%

Yes, but onlyonce or twice

39%

Yes, some time

50%

Confident About Enjoying Retirement Those who answered “very confident” or “extremely confident”

WHAT’S IT ALL MEAN?

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SECTION IV

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This is Just the Beginning

Sponsors have a desire to benchmark plans against plans of other similar companies •Is participation higher or lower?

•Do they offer loans?

•Automatic enrollment?

•Investment options, diversification?

•Managed account?

•Matches? How much?

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Using peer comparison to improve retirement

We want to know what other people are doing.

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More Information

INGRetirementResearch.com INGCompareMe.com

OPEN FORUM

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SECTION V

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Open Forum

Important Information

Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities.

The opinions, views and information expressed in this presentation are subject to change without notice based on market conditions and other factors. The information provided is not a recommendation to buy or sell any security.

Products and services are offered through ING family of companies. Please log on to http://ing.us for information regarding other products and services offered through ING family of companies. Not all products are available in all states. © 2010 ING North America Insurance Corporation

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