7 ways employers can help employees save more, more easily
It’s incumbent upon plan sponsors to make a little extra effort to help them do so.
Business Insider reports on seven ways that employers can help their employees to up their savings rates that can be relatively painless—some are steps that employers might have to incorporate into their plans, while others could be subtle nudges or part of financial wellness plans that can improve employees’ savings behavior.
It can be tough to set money aside on a regular basis, even when you know you need to. And despite the roaring results on Wall Street, that doesn’t mean that people are making enough to save enough for various goals—not that they’re all that well trained in figuring out the best way to manage their pay.
According to the report, the average American managed to stash just a little over 3 percent of disposable personal income in October, according to the U.S. Bureau of Economic Analysis. That’s really pitiful, compared with, say, Japan’s savings rates of 19.3 percent; even the U.K. does almost twice as well, according to global economic data provider Trading Economics.
The psychological factor plays a big role in how, and how much—even whether—employees save, not just for emergencies like car or home repairs but also for the much more distant goal of retirement.
In fact, the report points out that research points to forethought, self-control, and willpower are required in substantial measure to save money—something that runs counter to our tendencies toward immediate gratification.
In the report, Nobel Prize laureate and renowned behavioral economist Richard Thaler is quoted saying in a Wall Street Journal interview that saving for retirement is “cognitively hard” and that it's “obviously preposterous” to assume that everybody will figure out how much they have to save and actually carry out the plan.
To help improve results, sometimes it’s necessary to play mind games—and there are ways to help employees play those games to win. Here are seven ways that employers can do just that:
7. Think present. Act now.
When you view a goal as immediate instead of distant, it can be easier to achieve it, because of a little thing called time orientation.
According to the report, “the way we think about time in relation to our goals plays a major role in people’s ability to save.”
Look at it this way. If you think of retirement as 30 years off, it’s all too easy to postpone saving. If, however, we think of the immediate contribution as the objective instead of keeping our eye on the end goal of retiring, meeting the goal of the immediate contribution is more likely to get done.
Says the report, “In a 2014 paper published in ‘Psychological Science,’ scholars Leona Tam and Utpal Dholakia concluded that individuals who think about savings cyclically—seeing life events as a series of repeating experiments—are estimated to save 74 percent more than those who think linearly. People with linear time-orientation view life in past, present and future terms.”
So if your financial wellness program or some other effort, such as coaching, can make people focus on those repetitious goals of contributions, instead of the end result that’s so distant in time, they’re more likely to stick with the program.
And the repetitious nature of recurring contributions reinforces the likelihood that employees will keep contributing.
In addition, says the report, research shows that people with negative past memories about money are more likely to “be in good financial health. They are more conservative and likely to save for their future to avoid a repeat of previous negative experiences.”
Interestingly, those who are more focused on the future tend to be more optimistic, thus postponing savings and thinking they’ll catch up later. Of course, that seldom happens.
6. Automate savings.
Automating the process of retirement—and other savings—contributions takes away the need for people to actually decide about each action.
“If people have to actively think about saving, then they probably won't do it,” Shlomo Benartzi, a behavioral economist at the University of California, Los Angeles, writes in the Harvard Business Review, arguing that automated deposits are the most effective way to save for retirement.
When workers are automatically opted into a savings plan, whether for retirement or other savings, they don’t have to think about it.
And if they have to opt out, that makes the choice of not saving harder to carry out, thus reducing the odds that they’ll do so.
5. Automate regular savings increases.
By implementing an auto-increase or auto-escalation figure in retirement and other savings plans, employers can raise the amount employees save—something that is particularly important since most initial contribution rates set by retirement and other savings plans are too low to ensure that employees will actually save enough to see them through retirement.
And if employees don’t increase their savings percentages, they’ll come out the other end with far too little savings to get them through retirement in comfort.
In one segment of Thaler and Benartzi’s three-part “Save More Tomorrow” study, conducted during the late 1990s/early 2000s, the researchers followed 315 workers at an unnamed manufacturing company.
About 160 workers elected to increase their 401(k) contributions each year for four years and 32 of them opted out over the years, says the report.
But the people who agreed to raise contributions nearly quadrupled their savings rates. According to the report, “Once their savings strategy was set—increasing annually with their raises—very few people ever got around to changing their savings allocations again once they enrolled.” Easy, right?
4. Set an actionable plan with negative consequences.
People are more concerned with losing money than gaining it; thus, a plan that penalizes them for failing to achieve savings goals helps to keep them on the straight and narrow.
The idea is this, according to Dean Karlan, an economics professor at Yale University, who created the “commitment contract” theory: The contract allows people to set a positive goal to save more money, say, or to set a New Year’s resolution. Failing to meet the goal subjects them to some kind of penalty, according to the terms of their contract.
The report cites an example: “[A] die-hard animal rights activist might develop a commitment contract to save $2,000 in five months for an international trip, with the stipulation that if this person violates the contract, he or she must buy a $70 ticket to a SeaWorld theme park.”
While at present there’s no app for this (Shocking! How can this be?), employees could be encouraged to team up to hold each other accountable for following their goals—or to make that arrangement with a family member or friend.
Imagine the incentive to stick to your goals if you know that if you fail, a coworker will nag you to fulfill that negative obligation….
3. Focus on smaller goals first.
In a similar manner to focusing on an individual retirement savings contribution instead of the whole multi-decade plan, this breaks down a large objective into manageable sections and fools the mind into thinking that it’s more achievable.
Benartzi and his UCLA colleagues asked a group of participants if they thought they could save $5 every day, another group if they could manage $35 a week, and a third group whether they thought they could save $150 a month.
Even though the end objectives were the same, nearly 30 percent of the participants said they could save $5 a day, while only 7 percent committed to save $150 a month.
Now there are apps for this type of mind game—some that automatically transfer spare change from your checking account to your savings, or that automatically invest small amounts of money—but employees could actually resort to manually dumping change into a jar or, say, all $5 bills from their wallets into a savings account.
And apps can be part of a financial wellness program.
2. Save a bonus or other lump-sum windfall.
People don’t see bonuses, tax refunds, inheritances and other “surprise” sums of money the same way they do regular income, and find it easier to put it—or at least a major part of it—into savings.
Employers might want to encourage this by offering the option of a bonus being deposited into a savings account or other designated savings vehicle.
1. Track your spending.
There are plenty of apps for this, and employees can use them to see how much they actually spend on lattes or lunches out with an eye toward seeing what those “little luxuries” actually cost them. And reality bites.
Benartzi and fellow researcher Yaron Levi report that people who used a mobile app that tracked spending and investment performance cut back on their spending by 15.7 percent.
And even a 2016 Federal Reserve study found that approximately 62 percent of consumers with access to mobile banking checked their account balance on their phone before making a big purchase, and half of them decided not to buy that item because they were informed of their real-time account balance and credit limit.
Source: U.S. Bureau of Economic Analysis, Personal saving as a percentage of disposable personal income