In today’s increasingly complex financial world, individuals are faced with many competing financial priorities – from student debt to emergency health care expenses, to name a few. As a result, nearly a quarter of working adults report having no retirement savings or pensions, according to Federal Reserve data.
This lack of retirement savings is a long-standing societal problem, with persistent gaps in many demographic factors, including income, race and gender.
That’s not to say we haven’t made real progress. Although “automatic features” such as auto-enrollment and auto-increasing contributions have helped people save more, they are not feasible for all retirement savings plans, including many plans in the industry. public who do not have the right to use automatic registration. The good news is that new research shows an additional opportunity to help workers save more.
Reframe retirement savings
Enter a new kind of behavioral tools that employers need to consider: plan information framing.
When enrolling in a workplace savings plan, most individuals today choose a retirement savings rate that is displayed as a percentage of their total salary. Sounds simple, right? Unfortunately, broader industry research suggests that a number of people today have difficulty working with percentages, a challenge that becomes particularly problematic when it comes to choosing a rate that will help define one’s retirement savings.
To help all workers better understand the benefits of saving for retirement and reduce the impact of innumeracy, new research conducted in collaboration with Voya’s Behavioral Finance Institute for Innovation explored what would happen if workers saw their savings rate expressed as 7 cents for every dollar earned instead of 7%. In the new working documentReduce savings gaps with pennies versus percentage framing the study demonstrated that displaying a savings rate in terms of pennies per dollar earned can have a significant impact on savings behavior.
Specifically, the study found that this simple change had a particularly large benefit for workers in low-income groups, with an average income of $32,000. For this group, displaying savings rates as pennies on the dollar rather than as a percentage of salary increased savings rates by 1.15 percentage points. To break this down further, the study showed that in the percentage condition, low-income workers had an average savings rate of 6.88%, while in the pennies condition, the average savings rate was of 8.03%.
To put it bluntly, Professor Benartzi said: “This seemingly small change can have a big impact in helping to democratize higher savings rates for all workers, regardless of income. We should make it easy for everyone to choose a savings rate that helps them achieve financial security.
One of the main reasons “coin cropping” can help is that it can make retirement savings less abstract and more affordable. To add some additional context here, George P. Fraser, an independent financial professional who inspired scientific research on “penny cropping,” incorporated the penny approach into his practice. Although everyone understands what a penny is, many people might struggle with percentiles and percentages, he says.
‘Pennies’ beyond the plane
So what can employers take away from this research? Adding “coin framing” to plan design presents a great opportunity, especially for low- and moderate-income participants.
We also know that an individual’s savings picture today includes more than retirement, as having an adequate emergency savings fund and preparing for healthcare costs are just as important when it’s about saving for the future.
As a result, employers also have the option of considering the “coin framing” approach for savings accounts such as emergency savings, health savings accounts, and employee benefits.
An emergency fund, for example, could be built through a combination of penny framing and escalation where individuals could be asked to save one penny of every dollar earned for emergencies this year, two pennies this year. next and so on – until they have a viable reserve fund.
Whichever approach you take, there is a clear opportunity for employers to help make continued progress in closing the retirement savings gap. By conducting research on the impact of redesigning the architecture that may ultimately show better savings results, employers can help put their workforce on a better path to a successful retirement.
Rick Mason is Director of the Voya Financial Behavioral Finance Institute for Innovation and Senior Fellow at Carnegie Mellon University in Pittsburgh.
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