November 29, 2011
401(k)s: Reaching Young Employees
Nearly one in three employees under age 35 has not enrolled in their 401(k) retirement plan, according to almost half of the major corporations surveyed recently by Northern Trust.
It’s “imperative” that young employees save more than they do, said Lee Freitag, senior product manager for defined contribution solutions at Northern Trust, which surveyed Altria Group, Microsoft, Walgreen and other U.S. companies.
Today’s young workers will rely more on 401(k) savings than any previous generation, he said, now that employer-funded pension plans are virtually extinct in corporate America. Yet many are sacrificing their prime savings years. To retire at age 70, for example, a 25-year-old must save only 7 percent of his or her income, earning investment income over 40 years. This compared with a steep 18 percent of income for someone who waits until age 45 to start saving and has fewer years to accrue investment returns.
So, how to reach these young adults when it counts? To them, retirement in their 60s is an abstraction – they do not naturally focus on it. According to preliminary research out of the Mason School of Business at the College of William & Mary, how employers communicate may be the key to boosting savings among recent entrants to the workforce, given their long time horizon until retirement.
“We may need to communicate with younger workers differently than older workers,” Nicole Votolato Montgomery, Lisa Szykman, and Julie Agnew write in their new paper.
Their research indicates that employers can help younger employees define the steps they should take – by making them more concrete. This is a different twist on the psychology of saving found in other psychological research – when college students in one experiment saw computer avatars of their older selves, they wanted to save for their old age.
Here’s how the new experiment worked:
The researchers presented two groups of subjects with ads to encourage retirement saving: one group was between ages 18 and 34; the other was 50-64.
Each group looked at four ads, and the effectiveness of each was determined by how much subjects said they intended to save – as a percent of their income – after viewing them.
Two ads were “concrete” and two were “abstract.” For example, the title in the concrete test ads said: “How You Can Save More.” The abstract title: “Why You Should Save More.” The concrete ad also presented specific actions: “Step 1: If you haven’t done so already, set up your retirement account. Step 2: Aim to contribute 15%.” The abstract ad did not offer such steps.
Each ad also proposed either a short-term or a long-term savings goal. The short-term ad showed calculations of how much should be contributed biweekly. The long-term ad showed the total dollar amounts to be saved over their working lives.
An ad worked best for young adults if its “framing” – abstract or concrete – matched up with its goal. So, matching up the concrete ad with short-term goals or the abstract ad with long-term goals gave the biggest boost to the subject’s intended savings.
Framing didn’t seem to matter to older people who are much closer to retirement and already focused on it like a laser beam.
“You can’t really change a young person’s actual goals for retirement because they’re long term and will always be in the long term. But if you give them a closer goal that’s more current, you can get them to start thinking more concretely so they could then focus on the steps they need to take,” Szykman said.
To encourage 401(k) enrollment, behavioral economist Richard Thaler recently advised employers to “keep it simple.”
Taking the employees’ age into account may work even better.