Description of the programme

In 1980, 30 million U.S. workers actively participated in employer-sponsored defined benefit (DB) retirement savings plans, and 19 million actively participated in employer sponsored defined contribution (DC) retirement savings plans. By 2011, participation in DB plans had nearly halved to 17 million workers, while DC plan participation had skyrocketed to 74 million workers.

The shift from DB plans, which set contribution levels and investment allocations on behalf of employees, to DC plans, which allow employees to choose from a complex array of possible contribution levels and investment allocations, has arrived amidst concerns that workers are not equipped to make well-informed savings choices (Mitchell and Lusardi, 2011). Employers have become increasingly interested in programs designed to help employees make good choices in DC plans.

The study

• This randomised controlled trial assessed the effect of providing information on peer behaviour – known as ‘social norms marketing’ - on pension choice. The theory is that this information moves individual behaviour towards the peer group average.
• Participants were drawn from a large manufacturing firm and were all saving less than 6% through the firm’s retirement savings plan. Among these employees, some had been automatically enrolled at the 6% level and subsequently chosen to opt out or to make lower contributions (non-union employees). Others (union employees) had failed to opt in or had chosen lower contribution levels when they joined.
• Participants were randomly selected to receive one of three variations on a letter encouraging them to join or to increase their savings in the firm’s plan, as applicable: one version contained information on the behaviour of other employees in their five year age bracket, one contained behaviour of other employees in their ten year age bracket, and one contained no peer information.
• The average effect of the presence of peer information was measured by comparing the changes in the contribution rates between those who received letters with information on peer behaviour versus those who received letters without it (the control group).

What are the outcomes?

Preparing for and managing life events.

Key findings

• • Participants who received peer information were significantly less likely to subsequently enrol in the plan (6.3% versus 9.9%) than participants who did not receive peer information.
  • Being told that a higher proportion of their peers were already enrolled further reduced the likelihood of enrolment among this group.
  • Subgroup analysis suggests that the employees who reacted most negatively to peer information were those with lower than average earnings.
• • Peer information had no significant effect on employees who had been enrolled at 6% by default and who had subsequently chosen to opt out or to lower their contribution rate, nor did it have a significant effect on employees who had chosen to opt in at a lower level.
• • The explanation for this is that knowing who many of their peers were meeting the 6% saving contribution rate was a discouragement and a reminder of their low economic status

Points to consider

• • In a fiscal environment where individuals are not putting much into their pensions, this study offers a robust examination of why peer learning may not be a viable solution.
  • While the potential for positive ‘peer effects’ have been well documented, this study brings to life the importance of considering the potential for unintended consequences – for employees who earn little, peer information may be discouraging.
• • While the study was conducted in the US there is no reason to think that the results would not be generalizable to the UK.
• • The discussion section in this study explore its unexpected results and offer a plausible explanation for why peer information had a negative effect in this case. These considerations will be useful to anyone who is considering the use of peer information to alter financial behaviour.

Full report

The effect of providing peer information on retirement savings decisions - full report