Seeing others’ contribution rates could nudge low contributors to put more into their retirement accounts
External pressure is a powerful influence on human behaviour, particularly when it comes to financial decisions. Just look at how many people invested in cryptocurrencies last year despite advisors’ warnings, or how people could spend more based on how much money they see their neighbours spending.
But when used right, the tendency to chase the crowd could be used to help people make better decisions. Just as auto-enrolment and other nudges can put people on the right retirement-savings track, measures to show people how they compare against peers in nest-egg building could encourage laggards to accelerate their savings efforts.
“Of course, it isn’t as simple as sending plan participants a report comparing them to fellow co-workers, and, suddenly, everyone raises their savings rate,” wrote Bruce E. Wolfe, former executive director of the BlackRock Retirement Institute, in a piece for The Wall Street Journal.
Wolfe explained that people have to be compared to similar individuals, not just on the basis of having the same employer. That means results have to be compared based on age, gender, income level, family situation, and other key dimensions. “Knowing female co-workers around your age and income are on average saving 9% of their income, when you are saving 4%, might prompt you to incrementally up your contribution,” he said.
One potential pitfall in the comparison approach is the “magnetic middle” effect: those with above-average savings rates might ratchet back their efforts to align more with the average. To counter that tendency, Wolfe suggested that superior savers be sent positive nudges like smiley faces — a proven technique in encouraging decreased electricity consumption.
“[T]here could be a variety of avenues to encourage continued positive behaviors designed within privacy and legal constraints,” he added. Above-average performers could be given more refined ranking reports that show how much further they could move up within the super-saver club. Employers could also match high-saving employees’ savings with contributions to their retirement accounts or to the charity of their choice.
Another risk to the approach is that below-average savers could get discouraged because they think they’re lagging too far behind. For those workers, Wolfe said, a “baby steps” approach — encouraging manageable annual increases of 0.5%-1% over the next several years — might be appropriate.
“The good news is that the pieces exist today—from participant-level data and analysis to learning from other industries—for employers to start to incorporate peer-influenced elements into their [retirement] plans,” he said.