Type of retirement education determines how much employees save

The Center for Retirement Research at Boston College recently conducted a study to see if income projections affect retirement saving. It looked at 17,000 employees at the University of Minnesota who are more highly educated and have more retirement savings than the national population because they are covered by Social Security and have access to one of two generous employer plans. In addition, they also can contribute to a tax-deferred Voluntary Retirement Plan (VRP).

The experiment tested the effect of providing employees with age-specific projections of the additional retirement income they could get if they were to make additional contributions to a VRP.

The sample population was divided into four groups, a control group and three treatment groups, with each treatment group receiving one of three brochures. The “planning treatment” brochure provided general information on saving for retirement and a step-by-step guide for signing up for or changing contributions to a VRP. The “balance treatment” brochure added age-specific projections of how hypothetical additional contributions would translate into additional balances at retirement. The “income treatment” brochure added age specific projections of how the additional contributions would increase retirement income.

According to the issue brief, authored by Gopi Shah Goda, Colleen Flaherty Manchester and Aaron Sojourner, the center measured the effect on saving by measuring whether an employee made any change in his VRP contribution within six months of receiving the brochure and the change in the amount of the contribution for all employees.

It found that the “income treatment” had a statistically significant effect on the likelihood that workers would change their contributions and on the amount of their contributions. Compared to the control group, individuals in the income group were 1.2 percentage points more likely to change their contributions during the six-month period following receipt of the brochures—5.3 percent vs. 4.1 percent.

The income group as a whole increased its saving by an average of $85 more than the control group. Those who actually made changes in the income group increased their savings by a much larger amount, about $1,150 more per year than those in the control group.

Individuals in the other two treatment groups were also more likely to change their VRP contributions but did not show a statistically significant increase in the amount of saving, the study found.

“This finding suggests that it was not the income projections alone, but the combined effect of providing retirement planning information along with the balance and income projections that encouraged the increase in saving for those in the income group,” the report found.

In a supplemental survey, the Center wanted to determine whether the saving responses to the income treatment were connected to improved knowledge and confidence by asking several connections connected to the saving decision-making process.

Twenty-two percent of individuals in the study took the survey. It found that the income treatment had a beneficial and statistically significant effect on knowledge and confidence. Compared to the control group, the income group reported less difficulty finding information about how much to save for retirement and being better informed about retirement planning than they were six months prior. They also said they were more certain about how much retirement income they could expect and were more satisfied with their financial condition, according to the research.

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