In today’s increasingly complex financial world, individuals are faced with many competing financial priorities — from student debt to emergency healthcare expenses, just to name a few. As a result, nearly a quarter of working adults say they do not have any retirement savings or a pension, according to Federal Reserve data.
This lack of retirement savings has been a longstanding societal problem, with gaps persisting across many demographic factors, including income, race and gender.
That doesn’t mean we haven’t made real progress. While “auto features” like automatic enrollment and automatic escalation of contributions have helped people save more, they are not feasible for all retirement savings plans, including many public-sector plans that are prohibited from using auto-enrollment. The good news is that new research shows an additional opportunity to help workers save more.
Reframing retirement savings
Enter a new type of behavioral tools for employers to consider: the framing of plan information.
When enrolling in a workplace savings plan, most individuals today choose a retirement savings rate that is displayed as a percentage of their total paycheck. Seems simple, right? Unfortunately, broader industry research suggests that a number of individuals today have difficulty working with percentages, a challenge that becomes especially problematic when choosing a rate that will help define one’s retirement savings.
To help all workers better understand the benefits of saving for retirement and to 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 pennies for every dollar earned instead of 7%. In the new working paper “Reducing Savings Gaps Through Pennies Versus Percent Framing ,” the study demonstrated that displaying a savings rate in terms of pennies per dollar earned can have significant impact on saving behavior.
Specifically, the study revealed that this simple change had an especially large benefit for working individuals in lower-income groups, with an average income of $32,000. For this group, displaying savings rates as pennies per dollar rather than a percentage of one’s paycheck boosted savings rates by 1.15 percentage points. To break this down further, the study showed that in the percent condition, low-income workers had an average savings rate of 6.88% whereas in the pennies condition, the average savings rate was 8.03%.
To put this clearly, Professor Benartzi stated: “This seemingly small change can have a big impact in terms of 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 primary reasons “pennies reframing” can help is that it can make retirement savings seem less abstract and more affordable. To add further context here, George P. Fraser, an independent financial professional who inspired the scientific research on “pennies reframing,” has made the pennies approach a part of his practice. While everybody understands what a penny is, many individuals might struggle with percentiles and percentages, he says.
‘Pennies’ beyond the plan
So what can employers take away from this research? Adding the “pennies framing” to the plan design presents a great opportunity, particularly for low-and moderate-income participants.
We also know that an individual’s savings picture today includes more than just retirement as having an ample emergency savings fund and preparing for healthcare costs are equally important when it comes to saving for the future.
As a result, employers also have an opportunity to consider the “pennies 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 pennies framing and gradual escalation where individuals could be asked to save one penny out of every dollar earned for emergencies this year, two pennies next year and so on — until they have a viable reserve fund.
No matter what your approach, a clear opportunity is available for employers to help make continued progress in reducing retirement savings gaps. By conducting research into the impact of reframing architecture that can ultimately show better savings outcomes, employers can help set their workforce on a greater path to a successful retirement.
Rick Mason is director for the Voya Financial Behavioral Finance Institute for Innovation and is a senior research fellow at Carnegie Mellon University in Pittsburgh.