Retirement Plan Adviser Boosts DC Plan Outcomes with Common ‘Cents’

Plan sponsors should consider changing the information architecture for framing savings rates to boost defined contribution retirement plan participant savings and to address coverage gaps among demographic cohorts, according to industry experts.

New research from academics and Voya Financial provides additional context through which to consider the change.

The research, “Reducing Savings Gaps Through Pennies Versus Percent Framing,” examines the impact of using percentages to show participants’ savings rates, finding that they may lead to less desirable outcomes for some cohorts, including those with lower incomes who may be less financially literate or less comfortable with numbers.

“Relative to a percent framing, the pennies framing approximately doubled the intended savings rates of participants,” the paper states.

The research was authored by Stephen Chu, lecturer at Cornell University; Hal Hershfield, professor at UCLA; Richard Mason, director of the Voya Behavioral Finance Institute for Innovation; and Shlomo Benartzi, a professor emeritus at UCLA and a senior adviser to Voya Financial.

Penny-Framing Research

Researchers conducted an online study and a field study with more than 2,200 working individuals across several dozen organizations to determine how savings behavior would be affected.

The notion of penny-framing can be used to ease savings decisions for participants because it reframes percentages to whole dollar, or penny amounts, that are less cumbersome for some participants.

The study finds that by introducing the information architecture change from percentage framing to pennies framing, plan sponsors were able to boost participants savings rates, bolster their retirement readiness and beef up the DC plan’s outcomes.

When enrolling in a workplace savings plan, most people today are tasked with choosing a retirement savings rate that is displayed as a percentage of their total paycheck, the paper explains. However, broader research suggests that a large number of individuals today struggle to calculate percentages, a challenge that becomes concerning when seeking to choose a rate that will help define one’s retirement savings. To help all workers better understand the benefits of saving for retirement, Voya’s study reviewed what would happen if instead of featuring a worker’s savings rate as a percentage, it was described in terms of pennies-per-dollar earned. For example, a 7% savings rate would be expressed as saving “7 pennies” for every dollar earned.

In the study, workers were randomly assigned to two different conditions: A “typical” retirement enrollment screen with savings shown as the percentage of one’s salary, or a “pennies” condition with savings shown as a specific number of pennies for every dollar earned. This change in information architecture had a significant impact on savings behavior, especially for lower-income workers with an average income of $32,000. Specifically, the study found that workers in the percentage condition had an average savings rate of 6.9%; whereas those in the pennies condition had an average savings rate of 8.0%. To put this in perspective, this savings rate is nearly as high as the savings rate of those participants in the highest income group (a mean salary of $115,000), who saved 8.5% of their salary.

“Those in the lowest salary tercile elevated their savings rates by approximately 115 basis points from a baseline control savings rate of 6.88%,” the author’s state. “Floodlight analysis suggests that those with less than $50,000 in annual salary may be those most helped by pennies reframing.”

Plan sponsors could add penny framing to the growing toolbox of options to boost retirement outcomes for low-and moderate-income participants, and among demographic groups who have struggled to save enough for retirement

“As research on numeracy has shown, there is a significant percentage of people who are less capable in translating numbers or performing analyses that require multiple steps,” the paper states. “By using thinking architecture to decompose decisions into more relatable and concrete steps, we may be able to nudge better financial outcomes despite the gaps in the capabilities of individuals.”

The paper explains that when employer-based retirement programs were introduced, employees often indicated their contribution rates in whole dollars per paycheck to save for retirement. When salaries increased, remaining at a fixed amount would mean that savings rates would eventually decline. To resolve this, plans shifted to a percent-of-pay framing, “even though percentages represent a more abstract concept than dollars,” the paper states.

“We don’t do well with percentile and numeracy but everybody understands what a penny is,” says George P. Fraser, financial consultant and managing director of the Fraser Group at Retirement Benefits Group in Scottsdale, Arizona.

Pennies in Practice

Fraser explains that the change to pennies framing from percentages has “absolutely” been useful to boost participants’ savings rates and it is an effective measure he uses to bolster DC plan outcomes. 

As a retirement plan adviser, Fraser was first to note the pennies-framing concept is useful for retirement savings discussions to Benartzi after an event. He has since trademarked his “Pennies on the Dollar” education information architecture.

Pennies framing, from percentages, is used for a California casino 401(k) retirement plan for which Fraser serves as the adviser, he says. He explains that the plan’s figures are “high for any low wage-based company.” 

Installing pennies framing for the plan boosted savings and participation: currently to 800 participants with $40 million in plan retirement assets, a 97.7% participation rate and 9.2% average deferral rate, according to Fraser. “Oh my god, [it’s] beyond belief,” he adds. “It’s a low wage base.”

Reframing has worked for low-income participants to get these participants to save, Fraser adds.

“The beauty of this is it works so well with low wage-based companies where folks thought that there was no way they could get people to save—they just didn’t feel like they have the abilities to do it—and this works every single time,” he says. 

Pennies framing proved important to passing IRS and Department of Labor nondiscrimination testing as well, which is annually a top goal for plan sponsors, he says. “Because we have been able to do this, my plans pass the discrimination tests in places where they haven’t been able to in the past,” Fraser explains.