Reducing Savings Gaps Through Pennies Versus Percent Framing

Reducing Savings Gaps Through Pennies Versus Percent Framing

In the Reducing Savings Gaps Through Pennies Versus Percent Framing paper, the Voya Behavioral Finance Institute for Innovation tests whether reframing savings behavior in terms of pennies contributed per dollar earned rather than percent of salary can help workers with lower income. The paper reveals pennies reframing significantly impacts behavior — and policy makers, retirement plans and organizations can use this approach to help close longstanding savings gaps.

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Key Takeaways:

1. If possible, plans should consider re-enrolling all employees periodically, as it will have the largest impact on savings gaps and retirement outcomes.1

2. If auto-features and re-enrollment aren’t possible, retirement plans should consider the use of pennies framing, especially for disadvantaged groups.

3. This research focused on information architecture and retirement savings, but employers and their advisors and consultants should consider penny framing for other savings accounts, such as emergency savings, health savings accounts, and employee benefits.

  • For instance, an emergency fund could be built through a combination of pennies framing and gradual escalation. Workers could be asked to save one penny out of every dollar earned for emergencies this year, two pennies next year and so on, until they have a viable reserve fund.
  • Another approach could make it easy for workers to save a dime for every dollar they earn, with an automatic allocation of those funds to various accounts based on a personalization algorithm. For instance, they could ask a participant to allocate six pennies for retirement, two pennies for emergencies, and two more pennies for health savings.

View Working Paper

1 This assumes that auto-features are set up with characteristics properly informed by behavioral economics research, such as using appropriate, default initial deferral rates and annual escalator rates (e.g., not set too low). Beshears, John, et al. "How Do Consumers Respond When Default Options Push the Envelope?" SSRN 3050562 (2017).

Dr. Benartzi is a paid consultant to Voya Services Company, a wholly-owned subsidiary of Voya Financial.