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How a Simple Crop Can Boost Retirement Savings

“Pennies” on “percentage”? A new study finds that a simple change in information architecture, such as how the savings rate is framed, can lead to a significant increase in savings behavior among low-income employees.

Conducted in association with the Voya Behavioral Finance Institute for Innovation, researchers from Carnegie Mellon University (Dr Richard Mason), Cornell University (Stephen Shu) and UCLA (Hal Hershfield and Dr Shlomo Benartzi) published the results of a new field study involving more than 2,200 people working in dozens of organizations to examine an opportunity to help close long-standing retirement savings gaps that exist across many demographics .

To help all workers better understand the benefits of saving for retirement, Voya’s Reducing Savings Gaps Through Pennies Versus Percent Framing study examined what would happen if, instead of presenting the savings rate of a percentage worker, it was described in terms of pennies per dollar earned. For example, a savings rate of 7% would equate to a savings of “7 cents” for every dollar earned.

The researchers explain that when signing up for a workplace savings plan, most people are instructed to choose a retirement savings rate that is displayed as a percentage of their total salary. However, broader research suggests that many people struggle with calculating percentages, a challenge, they note, that becomes concerning when looking to choose a rate that will help define one’s retirement savings.

In the study, workers were randomly assigned to two different conditions: a “typical” retirement enrollment screen with savings displayed as a percentage of one’s salary, or a “pennies” condition with savings represented by a specific number of pennies for every dollar earned.

According to the researchers, this change in information architecture had a significant impact on savings behavior, especially for low-income workers with an average income of $32,000. The study found that workers in the percentage condition had an average savings rate of 6.9%, while those in the pennies condition had an average savings rate of 8%.

To put that into perspective, this savings rate is almost as high as the savings rate of participants in the highest income group (an average salary of $115,000), who saved 8.5% of their salary. , underlines the document.

Dr. Shlomo Benartzi, professor emeritus at the UCLA Anderson School of Management and senior academic advisor at the Voya Behavioral Finance Institute for Innovation, says behavioral economics has shown to be the most powerful tool for improving retirement outcomes for all employees is to re-enroll periodically. with appropriate default values. Benartzi further suggests, however, that the “behavioral economics toolkit” needs to be expanded to address situations where automatic features are not feasible.

“In this study, we showed how reframing savings decisions in pennies per dollar earned, instead of the typical percentage of salary, can have a significant impact on future retirement savings,” Benartzi notes. “As a result, this behavioral intervention has the potential to increase retirement income by almost 20% if implemented throughout the accumulation phase of one’s career.”

In their concluding observations, the researchers note that the use of “coin cropping” is particularly important because it provides an alternative for employers who want to improve employee retirement outcomes but don’t want to implement enrollment features. automatically in their retirement plans.

“While the industry has seen great success in helping people save more for retirement through ‘automatic’ features like auto-enrollment and auto-escalation, we know that these tools are not feasible for all plans or individuals,” observes Charlie Nelson, vice president and chief growth officer at Voya Financial.

Moreover, the penny intervention is relatively inexpensive and easy to implement, and penny reframing appears to close the savings gaps between low-income people (often those with low subjective numeracy) and those with lower incomes. higher income, the researchers point out. The main policy caveat, according to the document, is whether such an intervention should be targeted – for example at the level of a plan, a demographic difference or individual behavior – instead of being used on a large scale. .

Beyond the pension plan

While the findings of this study focus on retirement savings, employers also have the opportunity to consider pennies framing for other possible savings accounts, such as emergency savings, HSAs and benefits, the researchers suggest.

For example, an emergency fund could be built through a combination of penny coaching and gradual escalation. Workers could be asked to save a penny of every dollar earned for emergencies this year, two pennies next year, and so on until they have a viable reserve fund.

Another approach could make it easier for workers to save a penny for every dollar they earn, with those funds automatically allocated to various accounts, the paper explains. For example, employers could ask a participant to allocate six cents for retirement, two cents for emergencies, and another two cents for health savings.