Data and Research March 2, 2022

DC Plan Participant Savings Rates Can Be Boosted ‘By the Penny’

Reframing savings rates to pennies over percentages has proved useful in theory to boost participation and has shown success when put into practice.

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Plan sponsors should consider changing the information architecture for framing savings rates to boost defined contribution retirement plan participant savings and to address coverage gaps among demographic cohorts, according to industry experts.

New research from academics and Voya Financial provides additional context through which to consider the change.

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The research, “Reducing Savings Gaps Through Pennies Versus Percent Framing,” examines the impact of using percentages to show participants’ savings rates, finding that they may lead to less desirable outcomes for some cohorts, including those with lower incomes who may be less financially literate or less comfortable with numbers.

“Relative to a percent framing, the pennies framing approximately doubled the intended savings rates of participants,” the paper states.

The research was authored by Stephen Chu, lecturer at Cornell University; Hal Hershfield, professor at UCLA; Richard Mason, director of the Voya Behavioral Finance Institute for Innovation; and Shlomo Benartzi, a professor emeritus at UCLA and a senior adviser to Voya Financial.

Penny-Framing Research

Researchers conducted an online study and a field study with more than 2,200 working individuals across several dozen organizations to determine how savings behavior would be affected.

The notion of penny-framing can be used to ease savings decisions for participants because it reframes percentages to whole dollar, or penny amounts, that are less cumbersome for some participants.

The study finds that by introducing the information architecture change from percentage framing to pennies framing, plan sponsors were able to boost participants savings rates, bolster their retirement readiness and beef up the DC plan’s outcomes.

When enrolling in a workplace savings plan, most people today are tasked with choosing a retirement savings rate that is displayed as a percentage of their total paycheck, the paper explains. However, broader research suggests that a large number of individuals today struggle to calculate percentages, a challenge that becomes concerning when seeking to choose a rate that will help define one’s retirement savings. To help all workers better understand the benefits of saving for retirement, Voya’s 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.

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. This change in information architecture had a significant impact on savings behavior, especially for lower-income workers with an average income of $32,000. Specifically, 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 8.0%. 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.

“Those in the lowest salary tercile elevated their savings rates by approximately 115 basis points from a baseline control savings rate of 6.88%,” the author’s state. “Floodlight analysis suggests that those with less than $50,000 in annual salary may be those most helped by pennies reframing.”

Plan sponsors could add penny framing to the growing toolbox of options to boost retirement outcomes for low-and moderate-income participants, and among demographic groups who have struggled to save enough for retirement

“As research on numeracy has shown, there is a significant percentage of people who are less capable in translating numbers or performing analyses that require multiple steps,” the paper states. “By using thinking architecture to decompose decisions into more relatable and concrete steps, we may be able to nudge better financial outcomes despite the gaps in the capabilities of individuals.”

The paper explains that when employer-based retirement programs were introduced, employees often indicated their contribution rates in whole dollars per paycheck to save for retirement. When salaries increased, remaining at a fixed amount would mean that savings rates would eventually decline. To resolve this, plans shifted to a percent-of-pay framing, “even though percentages represent a more abstract concept than dollars,” the paper states.

“We don’t do well with percentile and numeracy but everybody understands what a penny is,” says George P. Fraser, financial consultant and managing director of the Fraser Group at Retirement Benefits Group in Scottsdale, Arizona.

Pennies in Practice

Fraser explains that the change to pennies framing from percentages has “absolutely” been useful to boost participants’ savings rates and it is an effective measure he uses to bolster DC plan outcomes. 

As a retirement plan adviser, Fraser was first to note the pennies-framing concept is useful for retirement savings discussions to Benartzi after an event. He has since trademarked his “Pennies on the Dollar” education information architecture.

Pennies framing, from percentages, is used for a California casino 401(k) retirement plan for which Fraser serves as the adviser, he says. He explains that the plan’s figures are “high for any low wage-based company.” 

Installing pennies framing for the plan boosted savings and participation: currently to 800 participants with $40 million in plan retirement assets, a 97.7% participation rate and 9.2% average deferral rate, according to Fraser. “Oh my god, [it’s] beyond belief,” he adds. “It’s a low wage base.”

Reframing has worked for low-income participants to get these participants to save, Fraser adds.

“The beauty of this is it works so well with low wage-based companies where folks thought that there was no way they could get people to save—they just didn’t feel like they have the abilities to do it—and this works every single time,” he says. 

Pennies framing proved important to passing IRS and Department of Labor nondiscrimination testing as well, which is annually a top goal for plan sponsors, he says. “Because we have been able to do this, my plans pass the discrimination tests in places where they haven’t been able to in the past,” Fraser explains.

Participants March 2, 2022

Combatting Participants’ Misperceptions About TDFs

It’s important for participants to understand how target-date funds work so they don’t have a false sense of security about their retirement readiness.

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AllianceBernstein’s “Inside the Minds of Participants” study found many misperceptions about target-date funds.

Regardless of whether participants invest in TDFs or not, most lack a basic understanding of how these funds work, according to the survey. Among plan participants overall, fewer than 40% have a clear idea of what the date signifies in a TDF’s name.

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The survey found misunderstanding has increased over time. For example, in 2015, 36% of TDF investors incorrectly thought the funds were FDIC-insured. In the 2021 survey, 68% mistakenly believe that.

Fifty-seven percent of TDF investors responding to the survey said they believe TDFs are 100% invested in cash at retirement. Meanwhile, half believe the funds guarantee a person will meet their income needs in retirement, and 42% reported they believe the amounts in the funds are guaranteed never to go down.

AllianceBernstein asked participants who think the funds include guarantees why they believe that. Nearly one-quarter (24%) said the materials about the funds say they are guaranteed, 35% said they believe the year listed in the fund name means it’s guaranteed to be sufficiently funded in that year, and 21% reported that a representative said the funds were guaranteed.

“We know this is not true; it’s participants’ perceptions,” says Jennifer DeLong, head of defined contribution at AllianceBernstein.

Megan Yost, senior vice president, engagement strategist at Segal Benz, says the AllianceBernstein research is consistent with other surveys—research finding that participants invest in more than one TDF show they don’t understand how the funds work.

Many TDF investors are defaulted into these funds and take a hands-off approach to their retirement savings. Still, having misperceptions about the funds can give participants a false sense of security about their retirement savings progress or retirement readiness.

Being defaulted into asset allocation vehicles, such as target-date funds, is a good thing, because when participants are their own portfolio managers, many were allocated incorrectly, DeLong says. “In an ideal world, they would have a better understanding of TDFs, but many people are not comfortable with investing,” she adds. “It’s important to continue to educate participants so they don’t have the wrong idea about their retirement readiness.”

After the financial impact of the pandemic and now with the volatility of the markets, participants are thinking more about their financial security, so it is a great time for plan sponsors to increase education.

Because many participants are defaulted into TDFs, it shouldn’t be a surprise that not all of them understand the funds, says DeLong, but plan sponsors shouldn’t be discouraged by the lack of knowledge because these participants still have more appropriate asset allocations. “There are many participants that do understand TDFs, but plan sponsors have an opportunity to do more education, especially with the events over the past two years making participants ready to do more planning,” she says.

Educating About TDFs

Heather Balley, director of participant communications at AllianceBernstein, says lack of knowledge among participants is not specific to TDFs but to finances in general. “It’s important for individuals to understand their overall finances and where they are invested,” she says.

Yost agrees. “What we know about financial literacy is it builds over time. That’s why it’s important to continue to educate and build on baseline knowledge year after year,” Yost says. “Hopefully that strategy will help clear up some of these [TDF] misunderstandings.”

Balley says when AllianceBernstein works with clients, they first hold a strategy session about what content will be provided and through what mediums. “Education should not just be included in the benefits handbook or fund prospectuses, but perhaps there should be a video to explain what a TDF is,” she says.

Balley adds that information should be provided in easy-to-understand language. There are terms that are obvious to those in the retirement plan industry but not to lay people. These should be defined and used consistently, and pictures and imagery can also be used, she suggests.

Yost suggests that plan sponsors and advisers provide information that is fun, because a lot of investment communication is complex and uses legalese. “Plan sponsors and advisers should think about what they can do in a fun way to enhance understanding, especially if a large portion of the participant population is in TDFs,” she says. “They can share videos and do fun quizzes to help clarify misunderstandings.”

Yost adds that examples are always helpful. “If looking at one [TDF] vintage, examples can help those in that vintage understand conceptually how TDFs work,” she says. She also suggests using analogies. For example, how a plane reaches its goal depending on whether it has a longer or shorter runway. “Try to relate it to everyday life for those people who don’t think about it every day,” she says.

Yost also suggests using a date of birth chart to explain in a different way than with date of retirement which target-date year is appropriate for a person’s age.

Yost says many recordkeepers have a wealth of materials about TDFs, so plan sponsors and advisers can start by talking to recordkeepers about the resources available to them. “Materials might need to be tweaked to match the plan, but you can still provide an education overview without talking about specific funds,” she says. “Ask providers about off-the-shelf videos, interactive brochures and content on their website about TDFs.”

In addition, if a plan sponsor partners with another provider for communications (maybe for annual enrollment), it can see what resources those providers might have about retirement plans and TDFs, Yost says.

Plan sponsors can also look to their advisers to help educate participants about TDFs. “Financial wellness is a hot topic right now, and plan sponsors have been looking to providers for the retirement plan to enhance general financial information. If there’s information about TDFs on those platforms, ask if it can be shared with participants,” she says. “Also, make sure it is clear to participants where they can go for one-on-ones and unbiased advice, if that’s part of the offering.”

Balley notes that AllianceBernstein’s research uncovered different investment personality types, and plan sponsors should try targeting education based on that. “Typically, participants are bucketed by generation, but we don’t subscribe to that,” she says. “There could be a Baby Boomer that is very tech savvy or a younger participant that doesn’t even have a computer or WiFi.”

Just as sites like Amazon can send customized suggestions based on previous views, the retirement industry is on the verge of such custom communication, Balley contends. The three investment personality types were “capable” confident investors, “eager” young and unaware participants, and “conservative” cautious savers. “If plan sponsors can tailor messaging to these groups, they can turn the tide to improve engagement,” she says.

With more talk about providing lifetime income for defined contribution plan participants and lawmaker and regulator efforts to do so, there might soon be more guarantees in participants’ investments. “If plan sponsors turn to providing guaranteed retirement income investments/annuities, that might provide a good opportunity to educate participants about the difference between those guaranteed funds and TDFs,” DeLong says.

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