How AI and fintech are encouraging retirement savings
Fintech and related tools informed by artificial intelligence (AI) has the potential to encourage more Americans to boost their retirement savings, according to a panel of experts at the Milken Institute’s 2023 Global Conference.
A panel on “Fintech and Other Innovative Solutions to Enhance Lifetime Financial Security” hosted by Cheryl Evans, director of the Milken Institute Center for Financial Markets, discussed the challenges that prevent Americans from saving more for retirement or cause them to underestimate how much money they need when the working days are over.
The spread of fintech, or financial technology, applications have helped expand access to retirement savings platforms beyond IRA or 401(k) accounts that some savers may find more difficult to set up or regularly deposit into.
Evans noted that platforms like Acorns and Betterment allow users to invest incrementally with small dollar amounts in fractional shares, which increases their overall savings rate and has served to “democratize finance” for beginners.
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The Acorns platform uses AI to analyze a user’s spending patterns to find ways to save, and also offers a robo-advisory service guided by AI to manage the user’s investment.
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Hal Hershfield, Professor of Marketing, Psychology and Behavioral Decision Making–at UCLA’s Anderson School of Business, explained that he recently worked with Acorns on a project to increase enrollments for an automatic deduction savings account. They offered potential users the option to sign up for plans to save $150 per month, $35 per week, or $5 per day.
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“What we found was that there was a (fourfold) increase in enrollment when the savings account was framed as $5 a day, and these were at small base rates. It was about 28% of people who signed up when it was framed as five dollars. a day,” Hershfield said.
He added that this framing of savings and investment “helped eliminate the wealth gap in savings” because the $150 a month figure was primarily attractive to savers in the upper quartile of the income scale.
While it was a “level playing field” in that there was no difference between income cohorts, although there was more dropout in enrollment among the lower income groups.
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Hershfield also discussed a unique project he has pursued at the intersection of psychology and economics that seeks to help individuals envision their future selves to emphasize the importance of savings and long-term thinking.
“We kind of start with the notion that one reason people have a hard time thinking long term is because they’re really fundamentally disconnected from their future selves. They don’t identify with them,” he noted.
Hershfield said he has worked with employees, students and bank customers to use age progression algorithms that leverage AI and give them a view of what they might look like in the future and visualize retirement.
“When I started doing this, the technology really wasn’t there. And now it’s pretty good. We can really show people a pretty realistic projection of what they’re going to look like in the future,” Hershfield said. “Obviously, we still have to do this for decades before we can test the accuracy of it. But this is just one kind of technology-based solution that we’ve been looking at.”
