The Secret to Getting Workers to Save More for Retirement

If we make it easy for people to do the right thing, more of them will reach their goals
Shlomo Benartzi and Richard Thaler

In the mid-1990s, we began thinking about how to solve an emerging problem: American workers weren’t saving enough for retirement. At the time, traditional pension plans were starting to disappear (they have since become increasingly rare), and it was clear that most workers would need help saving enough on their own.

Flash forward to today and that inability to save has become a serious societal problem: More than half of American workers might not have enough money in retirement to maintain their standard of living, according to an estimate from the Center for Retirement Research at Boston College.

Why is it so hard for people to save? In our research, we focused on two main behavioral causes: a lack of willpower and inertia. By identifying the problems, we were able to create a toolbox of nudges designed to make saving far easier. In examining the successes and failures of those nudges over the years, one thing has become clear: Making it easy to do the right thing (in this case, save more money) is often the best way to help people reach their goals.

Saving on autopilot

We all have self-control problems of various sorts when it comes to things we “should do” but don’t. Limited willpower creates what behavioral scientists call “present bias,” or our tendency to favor more immediate payoffs at the expense of longer-term goals. In a study published in 1998, subjects were asked to choose between two snacks: a healthy banana or some unhealthy chocolate. When asked to choose a snack to eat the following week, three quarters of people chose the banana. However, when those same subjects were later asked which snack they wanted to eat right now, nearly three-quarters chose the indulgent chocolate. The same logic applies to our money decisions. We know we should save for the future—it’s just hard to resist the spending temptations of the present.

Inertia, meanwhile, refers to our tendency to accept the status quo, especially when change requires attention and effort. When it comes to financial decisions, inertia can be an extremely powerful force. Data from the U.K. showed how strong this force can be. Researchers looked at enrollment rates in 25 traditional pension plans that didn’t require employees to contribute anything to get their benefits; it was the definition of free money. Nevertheless, only half of eligible employees signed up! 

Our challenge was to find ways to help people overcome these deeply rooted tendencies. The solution we came up with was modeled on the airplane autopilot, a system in which smart software controls most of the detailed movements of the plane. Airplane autopilots reduce human error, which makes flying far safer.

In much the same way, we developed retirement-saving autopilots, which are designed to make it as easy as possible for people to achieve a secure financial future. After all, retailers are really good at making it painless for people to spend their money, from credit cards to one-click purchases online. Our goal was to make saving effortless.The first step was “automatic enrollment.” Employees are enrolled in the company retirement plan unless they take the active step of opting out. This system is highly effective, generally getting about 90% of workers to participate in a plan by eliminating the inertia. The bad news is that automatic enrollment doesn’t ensure workers are saving enough. In fact, the majority of retirement plans suggest an initial savings rate of no more than 3%, which is dramatically less than what most workers need to save to maintain their standard of living in retirement. 

To fix that problem, it is necessary to help people surmount present bias, which can make it difficult to give up money today for the sake of future savings. We came up with an idea we called Save More Tomorrow, which we tested with the help of Brian Tarbox, a financial adviser. In that early trial, Brian talked one-on-one with workers. Armed with appropriate software, he was able to determine how much each employee should be saving. In nearly every case, it wasn’t enough. But when Brian asked the workers if they would be willing to increase their savings rate by 5 percentage points, most rejected the offer—they felt that they couldn’t afford to give up that much of their paycheck.

But Brian then asked the workers if they would commit to saving more in the future. Framing the question that way led to far higher levels of commitment, with 78% of the reluctant savers agreeing to increase their savings at a later date in much the same way the people in the snack study were willing to choose the healthy option for a later time. Once the workers joined the program, their savings rate automatically increased every year to ensure inertia was working for them and not against them.

The real test of the program was whether it led to higher savings rates. By this measure, Save More Tomorrow was a huge success. Before the intervention, the workers in the sample had an average savings rate of 3.5%. After four years in the program, their average savings rate had nearly quadrupled to 13.6%.

In the real world, however, most workers don’t have access to a financial adviser like Brian; instead, their enrollment process takes place online. To help these workers save enough for retirement, it is most effective to make savings increases automatic, with incremental boosts taking place every year. Although workers can opt out, research suggests 80% to 90% will choose to remain in the program. (By changing the default, inertia is turned into a positive force.) For comparison, a study we conducted with Ehud Peleg of UCLA using data from Vanguard Group found that only about 25% of workers were enrolled in a savings escalator before Save More Tomorrow was made the default choice.

The autopilots developed in Save More Tomorrow have gone on to become an instrumental part of the American retirement-savings system. In 2006, the Pension Protection Act passed by Congress encouraged employers to adopt automated savings escalators. According to our latest calculations, Save More Tomorrow has helped approximately 15.5 million Americans significantly boost their savings.

The takeaway is clear: By making the prudent path easy to follow, behavioral autopilots can help people reach their desired destination.

Details matter

But there is a very important caveat to these results: If you are going to automate a decision-making process, you need to pay careful attention to the details. If the plane is on autopilot and the crew pays less attention, then a flaw in the software could be catastrophic. 

With that in mind, we devised a checklist that includes seven key factors that can ensure that a retirement-savings program is a success.

1. Is the initial savings rate sufficient?

When you ask employers why they suggest an initial savings rate that is far too low, they often express concerns about employee blowback. A higher savings rate, they say, will increase the opt-out rate, or anger employees who end up with smaller-than-expected paychecks. New research by John Beshears, Shlomo Benartzi, Katherine Milkman and Rick Mason, however, suggests these concerns may be misplaced. The researchers, using data from 401(k) provider Voya Financial, found that it is possible in many cases to enroll workers in a plan with an initial suggested rate of 7% or more with little blowback and a significant boost to worker savings.

2. Does it contain an automatic auto-escalator? 

It isn’t enough to help people start saving. If a retirement program is going to succeed, it needs to help them save enough to maintain their standard of living in retirement. This typically requires an automatic escalator, which gradually raises savings rates to a sufficient level. We compared those enrolled in Save More Tomorrow to those who accepted a recommendation from a financial adviser to increase their savings rate by 5 percentage points today. The result? Those in the program with the automatic escalators had a savings rate that was higher than those in the other group within less than two years. To make saving even easier, we recommend automatically enrolling workers into the savings escalator, provided it’s also easy to opt out. 

3. When does automatic escalation stop?

Nearly half of companies with a savings escalator stop the automatic increases when the employee reaches a 6% savings rate. That rate is way too low: One useful rule of thumb is that workers should be saving at least 10% of their income annually, and considerably more if they got a late start. This means we need retirement plans with far higher savings targets.

4. Are the savings increases properly structured?

Automatic escalators should increase savings rates in 2-percentage-point increments, not the 1-percentage-point increments commonly used today. While the additional point might not make a big difference for workers who stay in the same job for many years, it’s an essential feature for those who change jobs frequently, since that typically means starting over at the initial rate. And since people seem to have identical reactions to proposed 1- and 2-percentage-point increases, why not get to the target saving rate faster? 

5. Do the savings increases take place at the right time?

Research shows that people are more willing to take action toward a goal when it takes place around a calendar landmark. This suggests that retirement plans could be more effective if they boost workers’ savings rates at specific times, such as Jan. 1 or on a worker’s birthday. Another idea is to tie savings increases to pay raises, so that employees never see a smaller paycheck or have to cut their spending. This minimizes the impact of loss aversion.

6. Does the new savings plan cover all employees?

Many retirement plans using Save More Tomorrow apply the program only to new workers, not existing employees. This is a major mistake. Given the effectiveness of Save More Tomorrow, limiting the intervention to new hires can create dramatic differences in the financial security of employees. Is it fair that someone who joined the company a few days before Save More Tomorrow went into effect has half the retirement savings of someone who joined right after it went into effect? More generally, we recommend that all plans have periodic “restarts” to nudge everyone to take a fresh look at their saving and investment strategies. 

7. Is the savings plan personalized?

Retirement plans currently offer all enrolled employees the same recommended savings rate, escalator and cap. This one-size-fits-all approach works well enough, but just imagine the possibilities if these plan features were instead personalized to suit the financial needs of the individual. Perhaps you started saving early, and thus can enroll at a lower rate; or maybe you have no savings at all, and need to accumulate a nest egg in less than two decades. If Amazon can personalize shopping recommendations, and Netflix can predict our new favorite show, savings plans ought to be able to come up with personalized nudges.

Updating nudges

Save More Tomorrow demonstrates the power of behavioral science to help address serious societal problems. But as the nature of work evolves and new technologies appear, we need to keep updating the features of the nudge.

A large number of workers today don’t have a workplace retirement plan available to them, either because they work for a small firm that doesn’t offer the option, or because they are self-employed. According to the Government Accountability Office, more than 40% of American workers are no longer traditional employees. Some are known as contingent workers, a category that includes the self-employed, independent contractors and freelancers. These people need a savings program that builds on the insights of Save More Tomorrow but relies on new digital tools.

One such tool is the “round up,” which takes the spare change from an electronic transaction and deposits it in a savings account. A Lyft driver, for example, could begin by putting aside the change from each fare toward savings—a ride that generates $9.50 would lead to $9 in income and 50 cents in savings—and then escalate the amount diverted toward savings each year. Over time, this could help a freelancer amass a significant nest egg, especially if the money is properly invested.

It is easy to get discouraged about the state of society; many of our biggest problems feel intractable. We aren’t quite so pessimistic. We believe that behavioral change is possible—we just need to use autopilots in our daily lives that are properly designed, tested and implemented.

To paraphrase American designer Charles Eames : The details aren’t details. They make the nudge.

The Wall Street Journal