Save More Today: Improving Retirement Savings Rates with Carrots, Advice, and Nudges

Abstract

Default savings levels in defined-contribution retirement plans are inadequate. Plan sponsors often focus on maximizing participation instead of overall retirement readiness, however. This has led to low default savings rates, and many plans that automatically enroll participants have experienced a decline in rates. Automatic escalation is one approach to raising savings rates; however, obstacles, such as employee turnover and the fact many plan sponsors offer automatic escalation as an opt-in arrangement, reduce its overall effectiveness. The author advocates focusing on solutions that have an immediate impact on retirement readiness. We need to save more today. Using participant and online survey data, three broad approaches to improve participant savings rates are explored: the carrot (stretching the employer matching contribution), the stick (in-plan financial advice), and the nudge (raising savings rate expectations with higher defaults and larger increases from automatic enrollment and automatic escalation). The results strongly suggest that increasing default savings rates is likely the simplest and most effective way to increase retirement saving. Acceptance of the default savings rate was roughly the same whether it was 3% or 12%, and participants who chose their own rate tended to save more at higher default levels (i.e., the default appears to be an “anchor” for these participants). Additionally, approximately 90% of participants who received in-plan advice increased savings rates, by about 2 percentage points, on average. This research suggests that relatively minor changes in plan design can have a significant impact on employee savings.