Pitch pennies, not percentages, to raise savings rate – study

Plan sponsors looking to encourage participants to save more for retirement might want to consider reframing the savings rate as pennies per dollar rather than the traditional percentage of pay.

In a new study released Feb. 24, Voya Financial found that participants are more comfortable saving, say, "seven pennies for every dollar they earned" than they are saving 7% of their pay, particularly if they're lower-income workers.

"We were interested in exploring how changing the information presented could potentially help boost the savings rates and reduce the inequity gaps within retirement plans," said Rick Mason, director of the Voya Behavioral Finance Institute for Innovation, a senior research fellow at Carnegie Mellon University and an author of the study.

He and fellow authors Shlomo Benartzi, professor emeritus at the UCLA Anderson School of Management and a senior academic adviser to Voya's Institute for Innovation; Hal Hershfield, a professor at the UCLA Anderson School of Management; and Stephen Shu, a behavioral finance adviser to Voya's Institute for Innovation and visiting lecturer at the Cornell Dyson School of Applied Economics and Management, had a hunch that framing the deferral rate as pennies per dollar might give participants who are "uncomfortable working with numbers" a more relatable way of seeing their options, Mr. Mason said.

Sure enough, the reframing indeed increased savings rates, especially among low earners. If framed in pennies, participants making $32,000 a year notched an average savings rate of 8.03%, higher than the average 6.88% savings rate if framed as a percentage.

As encouraging as the results were, the study emphasized that pennies framing would not supersede the power of auto enrollment, which the authors described as the "choice architecture" for increasing participant savings. Rather, the suggested new framing might be a tool for plan sponsors that don't want or are not permitted to implement auto enrollment.

"We've seen choice architecture used to great success in the retirement space in the context of auto enrollment in helping to boost savings rates of individuals, but not all employers can take advantage of auto enrollment," Mr. Mason said.

Certain government employers, for example, are prohibited from using auto enrollment, while others choose not to offer it due to "cost affordability or for philosophical reasons around seeming to be paternalistic," he said.

In 2021, just over 3 in 5 plan sponsors, 62%, automatically enrolled their employees in workplace retirement plans, according to the Plan Sponsor Council of America's latest annual survey of profit-sharing and 401(k) plans.

Annette Grabow, the Charleston, S.C.-based retirement programs manager for electrical distributor Sonepar USA, is so intrigued with the research that she plans to experiment with pennies framing even though the company automatically enrolls employees in its $1 billion-plus 401(k) plan.

"We have a campaign coming up in the second quarter that is focusing on increasing deferral rates," she said. "I think I will use this concept in our communications leading up to this and see what shakes," she said.

Ms. Grabow added that the research is timely as the company tests different communication theories targeting warehouse workers and drivers, who she said are the company's lowest paid.

Robert Beideman, the Atlanta-based director of retirement and financial well-being for Southern Co., is more skeptical about the study findings, saying that some people might like to see a percentage. When the gas and electric utility holding company allowed employees to have a fixed-dollar amount of their annual bonus deferred, for example, it received complaints from some that they would prefer a percentage instead.

"We initially had it as a percentage but changed to the fixed-dollar basis because of complaints," Mr. Beideman said.

Besides, Mr. Beideman added, most 401(k) vendors are programmed to handle the deferral rate on a percentage basis.

Paul Visconti, the Orange, Conn.-based director of retirement programs and investments for AVANGRID Inc., is skeptical, too. "The industry has spent such a long time getting employees to focus on putting away a percentage of pay," he said. "With auto enrollment being a mainstay, this seems like a bit of an outdated concept."

Even in situations where employers don't have auto enrollment, Mr. Visconti fails to see the point of pennies framing. "I feel like we have advanced past this type of messaging," he said.

Still, many in the industry applauded the study, saying pennies framing helps make figuring out how much money to defer easier.

"I think pennies on the dollar is a way to explain a percent in a way that people understand," said Barbara Hogg, a partner of wealth solutions for Aon PLC in Chicago. Unlike percentages, which are vague and for many people overwhelming, pennies on the dollar feel more manageable, she said.

Alicia Munnell, director of the Center for Retirement Research at Boston College, praised the study, calling it "clever," "convincing" and "perfectly done."

"To the extent that we still have this auto-enrollment gap, this will be another tool sponsors can use to try to get people to participate at meaningful rates," she said.

The study consisted of 2,255 participants in 86 workplace retirement plans that did not have auto enrollment. Half were presented with a typical retirement screen in which the savings rate was framed as a percentage of salary. The other half saw the savings rate expressed as pennies for every dollar earned.

The lowest-income participants — those making an average $32,000 who saved 1.15 percentage points more with pennies framing — were not the only ones swayed by pennies. Middle-income workers, too, reacted more favorably to pennies, though to a lesser degree. If framed in pennies, middle-income workers earning an average $59,000 a year set aside an average of 7.52%. Those presented with a percentage, in contrast, saved an average of 7.12%.

The pennies framing did not seem to impact high-income workers with an average salary of $115,000. High-income earners seeing pennies had an average savings rate of 8.49% while those seeing a percentage had an average savings rate of 8.52%.

Because lower-income workers boosted their saving levels the most, pennies framing could be a tool to help bridge retirement savings gap between high- and low-income earners, Voya's Mr. Mason said.

To drive his point home, Mr. Mason noted that pennies framing coaxed the lowest earners in the study to boost their savings rate to 8.03%, almost as high as the participants in the highest income group, which saved 8.5% of their salary.

A possible reason the impact of pennies framing is stronger among lower-income workers is that they might be less comfortable with percentages or less numerate, Mr. Mason said, explaining that lower income tends to correlate with lower numeracy.

Aon's Ms. Hogg, however, wasn't ready to jump to any conclusions.

"I do think that the pennies on the dollar approach could be really effective for some groups in terms of getting people to see that saving is manageable for them, but I don't want to ever imply that the lower-paid are the only ones with numeracy problems," she said. "I think we see this across many different levels."