Context

401(k) plans are advantageous tax-deferred retirement savings plans where US employers match the contributions of their employees. Changes in legislation in 2006 mean that some companies automatically enrol new employees in these plans. In other companies, enrolment is optional and many workers do not choose to enrol in a plan. This study seeks to understand the reasons for non-enrolment and explore whether an informational nudge could be sufficient to increase enrolment among employees.

The study

Research was undertaken with new employees of a US large employer, Branch, Banking and Trust (BT&T), to explore their attitudes and understand their decision making. Data on 401(k) scheme participation was provided for 7,832 new employees. A survey was conducted of new employees between December 2010 and May 2011 (N=356) covering attitudes to the 401(k) plan and the information they had received about it. This survey also explored their financial literacy and budgetary constraints.

A randomised controlled experiment then took place involving 4,111 workers that were not participating in the 401(k) plan. There were two treatment groups who received different versions of a flyer promoting the plan, to see if this simple nudge would affect participation rates compared to the control group who did not receive the flyer.

Key findings

• : Although c.40 per cent join a 401(k) plan within their first three months of employment, others do not join until they become eligible for matched contributions (one year after joining). Analysis of the participation data from 3,703 employees who joined in 2010 shows they became 14.8 per cent more likely to participate once they were eligible for the employer match. This is supported by data from the attitudinal survey, where 54 per cent (of 118 new employees) report they intend to join the plan when they become eligible for the employer match.
• : The proportion of employees who join the scheme is 48 per cent (of 7,862). Among males, over 45s and those earning $60k+ the proportion who join is significantly higher (59 per cent, 57 per cent and 71 per cent respectively).
• : Level of financial literacy correlates with propensity to join a 401(k) plan. A mean knowledge score was created from correctly answering five financial questions. Joiners scored 3.8, non-joiners scored 3.4 correct answers on average. It is hypothesised that improving financial literacy, especially around the tax advantages on 401(k) plans, could help increase participation in future.
• : The informational intervention (flyer) that was trialled led to a small but not statistically significant increase in 401(k) participation among all new employees. 6.8 per cent of those who received the flyer joined the plan compared to 5.9 per cent of the control group.
• : Among some sub groups there was a significant increase in uptake after receiving the flyer (+4.4 per cent among 18-24s, +3.0 per cent among 35-44s compared to the control). However, among 45+s the flyer seems to have reduced their likelihood to join the plan (-4.5 per cent vs. control).
• : It is suggested that altering the messaging of such nudges might improve their efficacy. The flyer used was more geared to those with a longer career remaining. The authors note that using a message tailored to those with less time until retirement might have succeeded better in increasing participation among older workers.

Points to consider

• This study is based on a single large US employer. It is not clear how widely these findings could be applied either to other industry sectors/ employers in the US, or to employers in other countries.

Full report

Can informational nudges increase retirement savings? - full report