Save More Tomorrow™: Using behavioral economics to increase employee saving (Thaler & Benartzi 2004)
Thaler, R., & Benartzi, S. (2004). Save More Tomorrow™: Using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1), S164-S187.
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- The study aimed to determine whether a retirement savings plan that automatically increased 401(k) contributions whenever an enrolled employee’s salary increased improved savings rates among employees.
- The authors compared savings rates among employees who opted to participate in the plan with savings rates among employees who declined to join the plan.
- Across the three experimental sites, average savings rates tended to increase, with higher increases for program participants than for nonparticipants.
- The quality of causal evidence presented in this study is low. This low rating means that we are not confident that the difference in savings rates between program participants and nonparticipants results from participation in the savings plan.
Evaluation of Save More Tomorrow™
The authors developed a savings program, Save More Tomorrow™ (SMarT), to increase employees’ 401(k) plan contributions by automatically raising participants’ contribution rates whenever they received a raise. The authors recruited three separate companies to introduce the program in the late 1990s and early 2000s and evaluated whether average 401(k) contribution rates increased after program adoption and whether participating employees contributed at higher rates than nonparticipating employees. Because automatic contributions timed to coincide with financial gains addressed two of the primary reasons many employees cited for contributing too little to their savings plans—procrastination and loss aversion, or a tendency to avoid decreases in available resources—the authors hypothesized that the program would improve savings rates.
The study described the results of three distinct demonstrations. The first took place at an unnamed U.S. manufacturing company in 1998, the second at a Midwestern manufacturing company called Ispat Inland in May 2001, and the third in two divisions of Philips Electronics in January 2002. In all sites, eligible employees had the opportunity to enroll in the SMarT program, which automatically increased participants’ 401(k) contribution rates when their salaries increased. The authors used administrative data from each site to compare the contribution rates of those enrolled in the program with the contribution rates of those not enrolled in the program.
At the first site, all 315 members of the company’s existing retirement savings plan were offered a one-on-one consultation with a financial advisor. For the 286 who accepted the offer, the advisor reviewed each employee’s retirement goals and contributions and recommended a new contribution rate. Those who were unwilling or unable to adopt the new contribution rate had the option of enrolling in SMarT. Of the 207 employees who were offered the SMarT plan, 162 accepted and 130 remained in the program through four pay-raise cycles.
At the second site, Ispat Inland, company management offered the new savings plan to its 5,000 unionized employees, inviting participation by letter and through posters in common spaces. Of those already participating in the company’s 401(k) plan, 615 enrolled in SMarT, as did 165 employees who had not yet opened a 401(k). Ispat Inland data were available through only one pay-raise cycle. Philips Electronics invited 815 employees who contributed less than 10 percent of monthly earnings to the company’s existing 401(k) plan to participate in the SMarT program. Eligible employees were employed in 2 of the company’s 30 divisions, with the other 28 divisions serving as a comparison group. Some employees also had the option of attending financial education seminars focusing on retirement savings. Other employees were strongly encouraged to attend the seminar and were offered additional individual financial advising sessions. Philips Electronics modified the original SMarT plan, automatically increasing contribution rates on April 1 regardless of increases in an employee’s compensation. Of the 815 eligible employees, 216 enrolled. These employees were allowed to choose from among a 1, 2, or 3 percentage point increase in savings rate.
- After implementing the SMarT program, average savings rates at the unnamed U.S. manufacturer increased from 4.4 to 10.6 percent of income.
- Among the employees at the anonymous company, those who joined the SMarT plan observed the greatest increase in savings rates, from 3.5 percent of income before the program to 13.6 percent of income by the fourth pay raise after joining the program.
- Average savings levels across all employees at Ispat Inland changed only slightly (from 5.5 to 5.8 percent of income) by the first pay raise after SMarT program implementation. However, savings rates among those who joined SMarT increased more over this period than did savings rates among those who did not enroll. Among employees who were already 401(k) plan participants, the saving rates among SMarT participants increased by 1.76 percentage points but decreased slightly for non-participants. Among employees who were not already 401(k) plan participants, increases were 2.28 and 0.26 percentage points, respectively.
- Savings rates among SMarT enrollees at Philips Electronics were 1.3 percentage points higher than among employees in comparison divisions after program implementation; at each of the two divisions for which SMarT was available, the savings rate increased more among employees who had not previously been saving through the 401(k) plan.
Considerations for Interpreting the Findings
In this study, employees at each of the three sites were offered the opportunity to enroll in the savings program. Thus, those who chose to enroll might differ systematically from those who chose not to enroll, whether in their predisposition or motivation to save for retirement or in other areas. Because the authors did not apply any statistical controls that would account for these differences or demonstrate that the groups were equivalent before enrolling or not enrolling in SMarT, the observed differences in savings rates might reflect factors other than savings program participation. It is also important to note that different sites applied different eligibility criteria that could also affect retirement savings outcomes. At Philips Electronics, for example, only less highly compensated employees were eligible to enroll in SMarT.
Causal Evidence Rating
The quality of causal evidence presented in this study is low. A low causal evidence rating means that we cannot be confident that the differences in 401(k) contribution rates between program participants and nonparticipants resulted from program participation alone. To provide more convincing evidence of the program’s effect on savings rates that satisfies CLEAR criteria, the authors could have used statistical models to control for pre-intervention differences in the participant and nonparticipant populations, thereby determining how much of the difference in savings reflected population characteristics and how much resulted from the savings program itself. Even such controls, however, do not account for intrinsic traits such as interest in saving that could account for some or all of the observed differences; only a randomized controlled trial can separate the effects of an intervention from the effects of both observable and unobservable characteristics.