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How Simple Reframing Can Boost Retirement Savings

Behavioral Finance

“Pennies” over “percent”? A new study finds that a simple change in information architecture, such as how the savings rate is framed, can lead to a significant boost in savings behavior among lower-income employees.  

Conducted in association with the Voya Behavioral Finance Institute for Innovation, researchers from Carnegie Mellon University (Dr. Richard Mason), Cornell University (Stephen Shu) and UCLA (Hal Hershfield and Dr. Shlomo Benartzi) published results from a new field study that involved more than 2,200 working individuals across dozens of organizations to examine an opportunity to help address the longstanding retirement savings gaps that exist across many demographic factors.  

To help all workers better understand the benefits of saving for retirement, Voya’s Reducing Savings Gaps Through Pennies Versus Percent Framing study reviewed what would happen if, instead of featuring a worker’s savings rate as a percentage, it was described in terms of pennies-per-dollar earned. For example, a 7% savings rate would be expressed as saving “7 pennies” for every dollar earned. 

According to the paper, the notion of reframing savings decisions in terms of pennies is credited to discussions with George Fraser, currently a Managing Director of Retirement Benefits Group. Fraser has used the pennies concept with several companies, usually with populations containing a significant proportion of lower-income employees, that have typically had low participation rates in their plans. The paper notes that he has anecdotally had success getting companies to increase participation rates to over 95% by getting employees to consider saving just 1 penny per dollar of their salary and increasing that by 1 penny every year.

To that end, the researchers explain that when enrolling in a workplace savings plan, most people are tasked with choosing a retirement savings rate that is displayed as a percentage of their total paycheck. However, broader research suggests that many individuals struggle to calculate percentages, a challenge, they note, that becomes concerning when seeking to choose a rate that will help define one’s retirement savings. 

In the study, workers were randomly assigned to two different conditions: A “typical” retirement enrollment screen with savings shown as the percentage of one’s salary, or a “pennies” condition with savings shown as a specific number of pennies for every dollar earned. 

According to the researchers, this change in information architecture had a significant impact on savings behavior, especially for lower-income workers with an average income of $32,000. The study found that workers in the percentage condition had an average savings rate of 6.9%, whereas those in the pennies condition had an average savings rate of 8%. 

To put this in perspective, this savings rate is nearly as high as the savings rate of those participants in the highest income group (a mean salary of $115,000), who saved 8.5% of their salary, the paper emphasizes.

Dr. Shlomo Benartzi, UCLA Anderson School of Management professor emeritus and a senior academic advisor to the Voya Behavioral Finance Institute for Innovation, explains that behavioral economics has shown that the most powerful tool to improve retirement outcomes for all employees is to periodically re-enroll them with appropriate defaults. Benartzi further suggests, however, that the “behavioral economics toolkit” needs to be expanded to address situations in which auto features are not feasible.

“In this study, we showed how reframing saving decisions as pennies-per-dollar earned, instead of the typical percent of pay, can have a meaningful impact on future retirement savings,” Benartzi notes. “As a result, this behavioral intervention has the potential to boost retirement income by almost 20% if implemented throughout the entire accumulation phase of one’s career.” 

In their concluding observations, the researchers note that the use of “pennies reframing” is particularly important because it provides an alternative to employers who want to improve employees’ retirement outcomes but who do not want to implement automatic enrollment features in their retirement plans. 

“While the industry has seen great success helping people save more for their retirement through ‘auto’ features like automatic enrollment and auto-escalation, we know that these tools are not feasible for all plans or individuals,” observes Charlie Nelson, vice chairman and chief growth officer at Voya Financial. 

Moreover, the pennies intervention is relatively inexpensive and easy to implement, and pennies reframing seems to close savings gaps between those with lower income (often those with lower subjective numeracy) and those with higher income, the researchers further emphasize. The main policy caveat, according to the paper, is whether such an intervention should be targeted—for example at a plan, demographic or individual behavioral difference level—as opposed to being used broadly. 

Beyond the Retirement Plan

While the findings of this study concentrate on retirement savings, employers also have an opportunity to consider the “pennies” framing for other possible savings accounts, such as emergency savings, HSAs and employee benefits, the researchers further suggest.  

For instance, an emergency fund could be built through a combination of pennies framing and gradual escalation. Workers 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. 

Another approach could make it easier for workers to save a dime for every dollar they earn, with an automatic allocation of those funds to various accounts, the paper explains. For instance, employers could ask a participant to allocate six pennies for retirement, two pennies for emergencies and two more pennies for health savings.