Misunderstanding savings growth: Implications for retirement savings behavior (McKenzie & Liersch 2011)
McKenzie, C., & Liersch, M. (2011). Misunderstanding savings growth: Implications for retirement savings behavior. Journal of Marketing Research, 68, S1–S13.
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Experiments Using Undergraduate Students
- This study used three experiments in a controlled setting to examine undergraduate students’ intuitions of retirement savings growth, understanding of investment concepts, and motivation to invest toward their retirement after entering the workforce.1
- The authors administered three surveys consisting of hypothetical situations followed by exercises asking respondents to compute an omitted element of the savings function (for example, the monthly deposit amount or rate of return required to accumulate a given amount of savings at retirement). Each experiment randomly assigned participants to receive or not receive some form of aid (for example, a calculator) or additional information (for example, savings growth charts) to complete the exercises.
- The first study found that participants tended to severely underestimate projected savings account balances at retirement and overestimate the rates of return and monthly deposit amounts required to ensure such balances. The second study found that when provided with information on exponential growth, participants were more motivated to save for retirement; however, in the third study there was no statistically significant relationship between information on exponential growth and motivation to save for retirement.
- The quality of the causal evidence presented in this portion of the study is high. This means we are confident that any differences in responses were a result of the various treatment conditions of the three experiments.
Analysis of Employees’ Survey Data
- The study further aimed to determine whether showing employees how much money they would have at retirement—based on current annual contributions, the current account balance, and return rates—can motivate them to increase savings, compared with showing employees current account balances only.
- The authors analyzed differences in employees’ interest in changing current levels of retirement savings, measured on a seven-point Likert scale, comparing those who were provided only their estimated 401(k) account balance at retirement and those who were shown only their current balance.
- The analysis demonstrated that showing workers actual account projections (in addition to the current balance) motivated them to save more.
- The quality of causal evidence presented in this portion of the study is also high. This means we are confident that showing employees their estimated 401(k) account balances at retirement increased the percentage of employees who wanted to save more each month.
Researchers conducted four experiments of interest to this review, all of which explored the impact of additional information on desires to save for retirement or perceptions about retirement savings. Experiments 1, 3, and 5 used college students as subjects; experiment 4 used workers. Experiment 2 is not of interest to this review.
The researchers first evaluated college students’ knowledge of the retirement savings process and motivation to save through three separate experiments. Each experiment was conducted at the University of California San Diego and included at least one treatment condition in which participants were randomly assigned to use additional tools or information to help answer survey questions:
- Experiment 1 asked 99 students to solve 16 questions assessing the amount of money that would be in a bank account given an interest rate, monthly contribution amount, and duration of time that varied across questions. A subsequent set of questions asked participants how much they personally would have to save if they were going to retire in 40 years, and to perform other related computations. About half of the students were randomly assigned to complete this task with the aid of a calculator and scratch paper (the treatment group); the other group (the control group) was instructed to guess and not to use a calculator or scratch paper.
- Experiment 3 asked 276 students to complete a survey on their intention and motivation to save for retirement in their first year of full-time employment and answer a set of questions asking them to compare the amount of money that would be available under different savings conditions. Students were randomly assigned to different versions of the survey, one of which highlighted the value of exponential growth, another focused on the value of savings in general, and a control survey that did not offer this information.
- Experiment 5 asked 80 students to complete a survey in which they were given a scenario indicating a savings rate and an interest rate and asked whether they would like to save more or less than the amount indicated, and by how much they would like to change savings. Students were randomly assigned to a treatment group that was provided with information on the estimated balance at retirement resulting from the savings and interest rates or a control group that did not receive this information.
In a final randomized controlled trial using 250 employees at an unnamed Fortune 100 company as subjects, the authors asked participants to complete a survey on desire to change one’s savings behavior. Participants were randomly assigned to treatment and control groups; those in the treatment group were shown their current 401(k) balance and projected 401(k) balance at retirement. Control group members were shown only their current 401(k) balances.
For each experiment, the researchers conducted descriptive analyses of survey responses and analyses of variances between groups to identify the impacts of the various treatments on the accuracy of future earnings calculations and motivation to save more.
- The experiments with undergraduate participants suggested that providing information on exponential growth can lead people to want to save more.
- In the experiment with working participants, a significantly higher percentage of those in the experimental group expressed increased interest in saving more for retirement post-intervention than in the control group (41 versus 27 percent, respectively).
Considerations for Interpreting the Findings
This study was a well-conducted randomized controlled trial with no attrition. There is no reason to believe that there were any systematic differences between the treatment and control groups. Additionally, although the authors did not report such output, they indicated there were no significant differences in relevant covariates (for example, gender, age, tenure, and salary) between the treatment and control groups for Experiment 4. Thus, there are no apparent confounds that could lead to biases in the results.
The results using data collected from undergraduate students must be interpreted with caution because the actions and opinions of these students might not reflect those of employed people who are saving for retirement (the population of interest for this topic area). In addition, all results in this study should be interpreted carefully because the outcomes analyzed relate to hypothetical, not actual, savings behavior. That is, the authors did not determine whether people acted upon their stated intensions to change behavior.
Causal Evidence Rating
The quality of the causal evidence presented in each of the experiments detailed in this study is high. For the studies involving college students, this means we are confident that any differences in responses and motivation ratings were a result of the various treatment conditions of the studies. For the study using employed people, this means we are confident that the observed differences in interest to save more for retirement between experimental groups accurately reflect the impact of seeing either one’s current 401(k) account balance or projected future account balance at retirement.
1An additional experiment was included in the study (called Experiment 2) but is not of interest to this review.