For an HR professional, one of the most aggravating aspects of open enrollment season is that no matter how many excellent and financially advantageous benefit options your company provides or how hard you try to explain their options, employees often seem to make the “wrong” choices.
Why is that? Why do so many employees insist on sticking with a traditional HMO or PPO when an HDHP/HSA would provide the coverage they need for less money? Why do so many employees neglect to set aside a portion of their paycheck for 401(k) savings, even though your company offers a generous match?
The truth is people do not always behave rationally or in their best interests. (As if, as an HR pro, you need to be told that.) But that doesn’t mean people are unpredictable.
By understanding the real reasons people make decisions—irrational though they may be—we can help people make better decisions. This is the principle behind the science of behavioral economics.
In this article, we’ll borrow from this emerging field of study to explore the biases that influence your employees’ open enrollment decisions, and we’ll show you how to use these biases for good: to guide your employees toward smarter choices.
What Is Behavioral Economics?
As explained by the University of Chicago, behavioral economics is not about how people should make decisions but how they actually do:
Behavioral economics is grounded in empirical observations of human behavior, which have demonstrated that people do not always make what neoclassical economists consider the “rational” or “optimal” decision, even if they have the information and the tools available to do so.
For example, why do people often avoid or delay investing in 401(k)s or exercising, even if they know that doing those things would benefit them? And why do gamblers often risk more after both winning and losing, even though the odds remain the same, regardless of “streaks”?
Behavioral economists—such as the Nobel laureate Richard Thaler—teach that we can help people make better decisions by understanding the psychology driving their poor decisions. With this understanding, we can “nudge” people in the right direction.
Again, according to the University of Chicago, “Automatically enrolling employees in 401(k) plans—and asking them to opt out rather than offering them the chance to opt in—is an example of a nudge to encourage better and more consistent saving for retirement.”
Related: How to reach employees with short attention spans. Read it here →
3 Cognitive Biases Influencing Employees’ Open Enrollment Decisions
Behavioral economics concerns itself with psychological biases that compel people to make decisions. Here are three common biases at play during open enrollment and how you can turn them to your advantage:
1. Status-Quo Bias
Every Friday night, you order a large pepperoni pizza from the same pizza place. The pizza is fine; you’ve become accustomed to it and don’t give much thought to trying other pizza purveyors.
Meanwhile, another pizza shop opens up in town. It earns rave reviews, but you’ll never read them. The pies have better ingredients, but you’ll never taste them. The menu is more affordable, but you’ll never know.
It’s not that you wouldn’t be interested in a tastier, cheaper pizza. The problem is it will never occur to you to seek one out. You have fallen victim to status-quo bias.
The status-quo bias isn’t so much the fear of change as it is the reluctance even to consider a change. Like many cognitive biases, the status-quo bias can serve a useful purpose. It saves us from constantly seeking alternatives—which can get exhausting. However, the status-quo bias can also keep us locked into suboptimal situations.
Status-Quo Bias During Open Enrollment
According to Aflac’s 2022-23 WorkForces Report, almost 90% of employees choose the same benefits each year—even though only 58% of employees are highly satisfied with their benefits. This is the status-quo bias at work. Employees want better benefits, but something is preventing them from changing.
Another number from the Aflac report points to an answer: 30. That’s the maximum number of minutes three out of five employees spend researching benefits.
Finding alternatives to the status quo is hard, often requiring much more than a half-hour of research.
How to Adapt to Status-Quo Bias During Open Enrollment
Think again about the pizza. If finding a new pizza place requires hours of browsing online reviews and countless trips to various shops to sample their offerings, you probably wouldn’t bother. But if a friend stopped by with a pizza from the better shop, enabling you to make a one-to-one comparison with your usual haunt, you might actually consider a change.
The same goes for open enrollment. Employees hate researching benefits, so, rather than considering alternatives, they often default to the benefits they already have. But you can help them overcome their habitual reversion to the status quo by making plan differences as clear and accessible as possible (the equivalent of waving a better slice of pizza under their noses).
For example, you can load your benefits guide with easy-to-read charts and graphs that put essential plan details (such as deductibles, premiums, and network sizes) side by side, making it easy to contrast new options with legacy plans. Be sure to include the factors that matter most to employees, such as how much money they can expect to save over the year by changing plans.
A good decision-support tool can also significantly reduce the cognitive burden associated with changing plans. PLANselect from Flimp, for example, takes only a few minutes to complete.
PLANselect’s advanced analytical algorithm can accurately predict an employee’s healthcare needs for the coming year with just a few basic questions. Plan options are presented in a straightforward, personalized comparison table that clearly indicates the best-value option based on each employee’s specific needs.
(Read more about how decision support can be your secret weapon for defeating the status-quo bias.)
2. Loss-Aversion Bias
You find a $20 bill in the parking lot. Pretty cool. Your $20 bill gets destroyed in the laundry? Tragedy!
The negative emotions we experience when we lose something are stronger (twice as strong, some psychologists say) than the positive emotions we feel when we gain something. As a result, most of us will do nearly anything to avoid a loss—even when the stakes are relatively low, and the potential gains far outweigh the risks.
This is the loss-aversion bias.
Like other cognitive biases, the loss-aversion bias exists for a good reason. Among other things, it can keep us from squandering our savings on “sure thing” investments. But fear of losing can also have us missing out on genuine opportunities.
Loss-Aversion Bias During Open Enrollment
In many ways, migrating from a traditional health plan like a PPO to a lower-cost one like an HDHP can seem like a loss. Doctor’s visits and medications may not be covered at the same rate until the deductible is met. Switching from a PPO to an HMO, the network may be smaller.
In addition, employees may be concerned about the potential for loss if they experience an accident or unexpected illness. Better to lose a little from every paycheck than to lose a lot should the worst occur, employees may reason.
How to Adapt to Loss-Aversion Bias During Open Enrollment
It comes down to how you frame your message. If you focus on the gains rather than the losses, employees may better see the value of plans like HDHPs.
For example, with an HDHP, employees stand to gain extra income with each paycheck, income they can apply toward financial goals like buying a house, saving for retirement, or paying off student debt. They also gain the tax-free spending power of an HSA.
With an HMO’s smaller network, employees gain access to an elite network of pre-vetted healthcare providers.
Likewise, HDHPs often have lower out-of-pocket maximums, meaning that they are better in emergency scenarios too.
Again, here, visual tools can be extremely helpful for showing employees what they stand to gain by switching plans.
For example, a simple bar graph might show how HDHP savings accrue every month, outweighing whatever might be lost through higher deductibles. A decision-support tool can help set employees’ minds at ease regarding potential loss by accurately forecasting their healthcare needs.
3. The Bandwagon Effect
The bandwagon effect is why most people in your area root for the same sports teams. It’s what drives fashion trends and smartphone sales.
Simply put, popular stuff is popular. We tend to assume there is wisdom in crowds and ascribe higher value to that which is chosen by the many over that which is chosen by the few.
Similar to the other biases discussed here, the bandwagon effect isn’t all bad. It’s a way to “outsource” the burden of decision-making and can be very useful in certain circumstances.
If you encounter road construction while driving in an unfamiliar town, you could pull over, pull up your maps app, and plot a route around it. Or you could simply follow the flow of locals who have already determined the best alternate route.
Of course, there are two significant problems with the bandwagon effect:
- The crowd is sometimes wrong.
- We are individuals, and what works for most people may not work for all.
The Bandwagon Effect During Open Enrollment
Benefit choices are personal, but that doesn’t stop employees from assuming that some options are more popular than others. Plus, employees do talk about benefits among themselves. Younger employees with less experience choosing benefits may ask older employees for guidance, and the more senior employees may recommend options less suited to young, healthy people.
In short, numerous employees may default to the same benefits year after year because “That’s what everybody does.”
How to Adapt to the Bandwagon Effect During Open Enrollment
You can beat the bandwagon effect during open enrollment in two ways. First, you can personalize benefit information for employees and their specific situations. When employees see how a particular choice would help or hurt them, rather than a generalized group, they’ll be more likely to break with the crowd.
As noted above, decision-support tools like PLANselect provide personalized plan recommendations, making side-by-side comparisons based on each employee’s projected needs.
The second strategy is to turn the bandwagon effect to your advantage. By sharing stories about other people who chose and benefited from particular options, you can help employees feel less alone in their choices. Short videos work well for this; you can also insert illustrated stories into your benefits guide.
Better Open Enrollment Results Through Behavioral Insights
The field of behavioral economics offers valuable insights into how people make decisions. By acknowledging that people don’t always act rationally and recognizing the psychological biases that influence their choices, HR professionals can take steps to guide employees toward better decisions.
The status-quo bias, loss-aversion bias, and the bandwagon effect are just a few cognitive biases that impact open enrollment decisions. (If you’re interested in discovering more, the Decision Lab provides a fascinating list of nearly 100 common cognitive biases.)
As we’ve shown, with some creativity and technological assistance, you can overcome these biases and even take advantage of them, resulting in greater satisfaction and financial well-being for your employees and your organization.
