Save More Tomorrow by Shlomo Benartzi

Author:Shlomo Benartzi [Benartzi, Shlomo]
Language: eng
Format: epub
ISBN: 9781101580332
Publisher: Penguin Publishing Group
Published: 2012-04-12T04:00:00+00:00

SYNCHRONIZATION VERSUS NON-SYNCHRONIZATION

The ideal retirement plan would include automatic enrollment in the plan (Auto-Takeoff) and automatic enrollment in the savings escalator program (Auto-Climb). It would also include synchronization of saving increases with pay increases, as described here. We recognize that synchronization is not always possible, for administrative- and bookkeeping-related reasons. During our research on SMarT, we were interested in how program participants valued synchronized versus non-synchronized program designs. Ideally, we would like to have done a field experiment in which half the participants of a retirement plan were offered a savings escalator program with synchronization, and the other half, non-synchronization. We would then have been able to measure directly which design is more attractive to participants. There are, however, practical obstacles to doing such an experiment.

Instead, with the help of Warren Cormier of the Boston Research Group, we initiated a survey of 5,246 retirement plan participants (Cormier, 2006). We wanted to measure participants’ interest in the two different plan designs. Half were asked to record their interest in joining a savings escalator program in which the first saving increase would occur next January. The other half were asked the same question, but were told that saving increases would be synchronized with pay increases. Thirty-two percent of participants in the first group said they would be either very interested or extremely interested in joining such a non-synchronized program. Synchronization was slightly more popular, with 38 percent of participants in the second group saying they were very interested or extremely interested (Benartzi et al., forthcoming).

The difference between the two groups—6 percentage points—is statistically significant, but not dramatic. This tells us that nominal loss aversion is a second-order effect in the program. Plan sponsors who find it difficult to include the synchronization feature can therefore feel comfortable setting the saving increase date as January 1. In this case, however, loss aversion may cause participation rates to be a little lower than they otherwise would be. Synchronization is an attractive design feature to have in a savings escalator program, but it is not critical.

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