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Economists, financial planners and employers have long debated how to encourage lower-income workers to change their savings behavior. Part of the answer may be as simple as reframing the way in which savings plans are presented. That's according to a report from Voya Financial about a new field study by university researchers that involved more than 2,200 working individuals across dozens of organizations.
"While the industry has seen great success helping people save more for their retirement through 'auto' features like automatic enrollment and auto-escalation, we know that these tools are not feasible for all plans or individuals," said Charlie Nelson, vice chairman and chief growth officer at Voya Financial.
"In this study, we showed how reframing saving decisions as pennies-per-dollar earned instead of the typical percent of pay can have a meaningful impact on future retirement savings," said Shlomo Benartzi, a senior academic advisor on the study.
When enrolling in a workplace savings plan, most people must choose a retirement savings rate that is displayed as a percentage of their total paycheck. However, broader research suggests that a large number of individuals struggle to calculate percentages, a challenge that becomes concerning when seeking to choose a rate that will help define one's retirement savings.
A Voya study reviewed what would happen if instead of featuring a worker's savings rate as a percentage it was described in terms of pennies-per-dollar earned. For example, a 7 percent savings rate would be expressed as saving seven pennies for every dollar earned.
In the study, workers were randomly assigned to two different conditions:
- A "typical" retirement enrollment screen with savings shown as the percentage of one's salary,
- OR a "pennies" condition with savings shown as a specific number of pennies for every dollar earned.
This change in information architecture had a significant impact on savings behavior, especially for workers with an average income of $32,000.
Specifically, the study found that workers in the percentage condition had an average savings rate of 6.9 percent but those in the pennies condition had an average savings rate of 8 percent.
"As a result, this behavioral intervention has the potential to boost retirement income by almost 20 percent if implemented throughout the entire accumulation phase of one's career. More importantly, it reduces longstanding societal gaps in savings behavior, making it easier for lower-income employees to better prepare for retirement" said Benartzi.
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