Apparently, keeping up with the Joneses doesn’t work for 401(k) savings.
New research suggests that showing people how their retirement finances stack up against those of their peers not only doesn’t motivate them to save more — in some cases it actually discourages them from participating at all.
The paper, published in The Journal of Finance in collaboration with researchers from Harvard University and the University of Pennsylvania’s Wharton School, suggests that so-called “social norms” marketing may not have the desired results for retirement savings plans.
The notion behind “social norms” is that human behavior is influenced by what people consider to be “normal,” and that by correcting and/or adjusting their perception about what normal behavior is, you can motivate the underperformers to move closer to the norm. This has worked in some circumstances; for example, the report notes that utilities have enjoyed success at encouraging conservation by showing consumers how their energy use compares to that of their neighbors.
The researchers (James Choi, John Beshears, David Laibson, and Brigitte Madrian of Harvard, and Katy Milkman of Wharton) conducted their research at a company that wanted to encourage its employees to save more for retirement. That company sent about 1,400 workers who weren’t participating in its 401(k) plan a simplified enrollment form that let them start contributing 6% of their pay to the 401(k) just by checking a box, signing and mailing the form back.
What they did differently was that they provided different workers different versions of the form. Some were randomly chosen to get a form that revealed the fraction of co-workers in their age group who already were contributing to the 401(k), and others got a form without this information.
While the researchers expected that this peer knowledge would influence behavior, they found no evidence of that. Moreover, the group of nonsavers that they had hypothesized as most susceptible to peer influence — those who weren’t subject to 401(k) automatic enrollment — were actually discouraged from participating by having access to this information. The researchers noted that most of the people in this group weren’t opposed to saving; rather, they simply hadn’t gotten around to joining the plan. But this peer information actually reduced subsequent enrollment rates in this group by a third — from 9.9% to 6.3%.
The researchers entertained a couple of different explanations for this outcome; for example, perhaps seeing that fewer of their coworkers were saving than they had thought suggested to them that “normal” was not saving (or saving less).
They noted that the negative effects of peer information were concentrated among those with low salaries — consistent with previous studies showing that negative information typically has a stronger effect on low-status individuals. Ultimately, they concluded that peer information most likely reduced savings because it left those who weren’t saving feeling too discouraged.
So for all you participants out there… keep your eyes on your own statements!
