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The Easiest Way to Get People to Save More

Philip Moeller

In a marriage of financial literacy and behavioral economics, researchers were able to boost retirement-plan contributions simply by telling people the benefits of doing so. Besides reminding people about the general benefits of retirement savings, the large-scale test also showed different groups exactly how much their future assets would grow and how much income those assets would regularly produce during the person's retirement years.

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With the disappearance of traditional pensions, 401(k)s and other self-directed workplace retirement programs have become the primary source of private retirement savings. Recent contribution levels have increased, but not to levels that most experts feel are sufficient to support even modestly comfortable retirements.

People with little disposable income were less likely to respond to the test's printed brochures and follow-up materials, as were those who displayed a "live for today" approach to lifestyle decisions. Lastly, people who tended to procrastinate were also less likely to respond to the materials.

However, roughly 30 percent of people in the test were more likely to change their retirement-plan contributions. And among those who did change contributions, the average increase was about $1,150 a year. The total average income of the nearly 17,000 employees in the test was about $60,000 a year.

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Americans are often criticized for having low levels of financial literacy. In their study, co-authors Gopi Shah Goda, Colleen Flaherty Manchester, and Aaron Sojourner noted that making appropriate retirement savings and investment decisions entails "an understanding of the relationship between current contributions and income in retirement, but requires a level of financial sophistication that many Americans may lack."

To test the value of an informational campaign, they set up four groups. One group received no information and a second group received general information about retirement savings. The third group got the general information plus projections of how much their nest eggs would grow by the time they retired. The last group got all this information plus a projection of how much regular retirement income their nest eggs would generate.

The research confirmed that many people do not understand the concept of compounded earnings growth or the related benefit of long-term asset accumulation. In addition, making the transition from accumulating retirement assets to spending them down during retirement is difficult.

While the second and third test groups displayed some awareness benefits from the information they received, they showed little change in savings behavior. People in the fourth group, however, made material increases in their retirement savings. "Full income projections drive the observed effects," the study said.

[See How to Calculate Your Retirement Number.]

Some proposals to boost Americans' retirement savings have included calls for new mandatory accounts and even additional government subsidies. "This study provides proof of concept for a policy that requires no additional mandate on individuals or subsidy for saving," the researchers concluded. "Providing retirement income projections--an extremely low-cost intervention--can actually affect individuals' savings behavior."

"The effects manifested were not large on average and were found only in a small share of the sample," they continued. "However, among those who made changes, effects were substantial and suggest that similar policies may help some individuals move closer to their retirement goals."

The employees in the test all worked for the University of Minnesota system. This group is likely to be more educated and financially literate than the general population, the researchers noted, and said the impact of an information campaign probably would be larger on a less-sophisticated group of employees.

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