OPINION: This Financial Literacy Month, employers can help make progress in reducing retirement savings gaps: Display savings rates as pennies per dollar rather than a percentage of a paycheck.
In today’s increasingly complex financial world, individuals are faced with many competing financial priorities — from student debt to emergency healthcare expenses, just to name a few. As a result, nearly a quarter of working adults say they do not have any retirement savings or a pension, according to Federal Reserve data.
Reframing retirement savings Enter a new type of behavioral tools for employers to consider: the framing of plan information. Specifically, the study revealed that this simple change had an especially large benefit for working individuals in lower-income groups, with an average income of $32,000. For this group, displaying savings rates as pennies per dollar rather than a percentage of one’s paycheck boosted savings rates by 1.15 percentage points. To break this down further, the study showed that in the percent condition, low-income workers had an average savings rate of 6.
‘Pennies’ beyond the plan So what can employers take away from this research? Adding the “pennies framing” to the plan design presents a great opportunity, particularly for low-and moderate-income participants. An emergency fund, for example, could be built through a combination of pennies framing and gradual escalation where individuals 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.
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