When it comes to nudging people to start saving for retirement, a new study shows one simple nudge really works.
Motivating people to save for retirement isn’t easy. Fraught decisions around when to start a nest egg, how much to set aside, and where to invest can be so overwhelming that inertia often sets in.
The number of families participating in retirement plans has steadily declined since 2001, according to the Economic Policy Institute.
Increasingly, economists who study this paralysis have shown that minimizing the complexity surrounding retirement choices inspires workers to start saving—and at higher rates.
For the study, which will appear in the Journal of Public Economics, researchers looked at a demographic with a poor track record of retirement saving—US military service members—and discovered how a single step can drive enrollments in workplace retirement programs.
“When faced with a complicated choice they end up throwing their hands up in the air and don’t save anything at all.”
The researchers found that people are more likely to sign up for an employer-sponsored savings plan when urged to begin contributing a specific percentage of their income. The mere suggestion of a contribution amount—and not the amount itself—led to a 26% increase in the likelihood that a service member would enroll in the military’s version of a 401(k).
“Our results show that just giving somebody a number—no matter what the number is—can be a helpful step in encouraging them to participate in a retirement plan,” says Jacob Goldin, a faculty fellow at the Stanford Institute for Economic Policy Research (SIEPR) and an associate professor at Stanford Law School.
The results also suggest that having to choose whether to contribute 3%, 4%, or 6% of a paycheck can be too much for some people.
“Even though they know they should be saving some amount,” he says, “when faced with a complicated choice they end up throwing their hands up in the air and don’t save anything at all.”
Keep retirement savings process simple
The direct link that the new study shows between including a contribution rate and a resulting uptick in plan sign-ups adds to a growing body of research showing that policies and programs that simplify the retirement planning process improve savings rates.
“Our research provides some of the first causal evidence that the complexity of retirement planning decisions can be a major barrier to saving,” Goldin says.
In 2016, Goldin was working as a legal advisor in the Treasury Department when the research opportunity arose as part of a broader effort by the Department of Defense to address the problem of very low participation rates in the military’s retirement program. Only 43% of service members were enrolled in its Thrift Savings Plan (TSP), as it is known, versus 87% of civilian federal employees.
The study included nearly 300,000 active army personnel not participating in the TSP despite being eligible to do so for an average of six years. The idea was to see how these service members—who tended to be younger, less educated, and racially diverse—would respond to one of two types of emails urging them to sign up.
The researchers divided the study participants into three groups: A control group that did not receive any communication; a second that received a message encouraging them in general terms to enroll; and a third that got the same email as the second cohort, but one that included a specific contribution rate.
These service members were given a number ranging from 1% to 8% in order to rule out the possibility that the rate itself—rather than the simple act of including one, no matter the amount—drove any increase in participation.
The researchers found that 2.7% of the control group signed up for the TSP within the first three months of the experiment. Sending a general encouragement email increased the likelihood that a service member would join the TSP by 0.4 percentage points. The email identifying a specific contribution rate boosted the probability of enrollment by 0.7 percentage points.
The results are statistically significant, Goldin says. Those who were simply urged to participate were 15% more likely to do so. The probability that those who received the extra nudge of a highlighted percentage rate would sign up was 26%. These members were also more likely to contribute more of their paycheck than those who did not receive any communication and those who did not get a highlighted rate.
Moreover, Goldin and his collaborators report that the increase in participation rates persisted throughout the two-year study period. This suggests that including a contribution rate did not motivate service members who would have signed up anyway to do so sooner. Instead, it inspired members who otherwise might not have enrolled.
“It’s significant that we are seeing any improvements at all, because this is a hard-to-reach group that has been resistant to saving in the past,” Goldin says.
Reducing complexity increases participation
One key drawback is that the researchers do not know how many service members who were sent either of the two emails actually opened or read them.
The authors cite prior research estimating that less than 6% of active duty soldiers opened a Department of Defense message about a different financial services program. Based on that open rate, Goldin and his coauthors conclude that participation rates among members who received both emails would have risen overall by 7% and 13%.
“To the extent that some people just saw the message and deleted it or missed it altogether,” Goldin says, “the effects we are measuring would be even bigger.”
The research has important implications, Goldin says, not just for the US military, but for all employers that offer workplace retirement plans.
“The type of policy we identify is not going to solve the problem of under-saving. But it shows how simple, low-cost steps can reduce the complexity of retirement planning and increase participation in savings programs.”
Additional coauthors are from New York University, the United States Military Academy at West Point, the College of William & Mary, and Stanford.
Source: Krysten Crawford for Stanford University