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Field Work

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.

7 Responses to 401(k)s: Reaching Young Employees

  1. I wish I could get my younger employees to see the long-term benefits of the 401(k) plan. I attempted to show them the benefits of contributing, but they just don’t seem to care. I guess I was young once, yet I wish I had listened. I will share this post with them.

  2. Lawrence Littlefield says:

    Like much else in the public and private sectors, 401Ks are stacked against younger employees. First of all, most employers have stopped contributing to “defined contribution” plans, or contribute very little.

    The defined contributions were high right after younger employees were given 401Ks in lieu of pensions, then reduced in each recession. Meanwhile, public employees in most cases have had their pensions retroactively enhanced, leading to tax increase and service cuts.

    What the non-executive class, non-political class serfs are left with is a tax break from the government in exchange for allowing your employer to pick who you invest with, rather than doing it yourself. Do those employers pick the lowest fee option? If not, how do they pick?

    Meanwhile, to make up for the generational inequities in the public sector, politicians are openly talking about means testing federal old age benefits. That means the young and save and sacrifice now and then live in poverty and ill health in old age because their Social Security and Medicare are taken away (based on their savings). Or not save and sacrifice now and still live in poverty and ill health in old age.

  3. Jay DeVivo says:

    Stanford University conducted some interesting experiments on “age morphing” of young people, which proved to have a profound impact on their willingness to save (though it should be noted the study did not follow up on actual savings behaviors).

    Young people were shown avatars of themselves either based on how they look today or decades into the future. The group that was presented with their “future selves” consistently indicated they would save at a higher rate, than those looking at their un-aged avatars.

    There are likely several real-world applications that can harness this “Proteus effect.”

  4. Tim says:

    Interesting post. I like the idea of laying out specific steps to take.

    Unfortunately, by the time young people enter the workforce, it may already be too late. The level of financial illiteracy in young workers is shocking.

    In my opinion, the root problem rests with the failure of the education system (and parents) to adequately prepare young people for life. Lifetime financial planning concepts should be required in core high school curricula.

  5. Chris says:

    I participate in my employer’s 401(k) plan. However, in my situation, I am pretty sure I am paid below market rate. I know I definitely don’t get paid enough to both save and make ends meet (i.e., take care of my family). It might be more beneficial to consider how companies can be persuaded to pay market rate or better so that their employees can then afford to participate more in the 401(k) plan.

  6. Neil Rhein says:

    I agree that we need to start with financial literacy. This should be part of the core curriculum at every high school (where many parents could also take a remedial course). It would also be interesting to see if advertisements that show a negative outcome (similar to the old “this is your brain on drugs” ads) would have an effect. Maybe if young people saw themselves stocking supermarket shelves at the age of 70, rather than sunning themselves on the beach, this might inspire them to save.

  7. The first step in this process should be separating the words “401(k)” and “savings.” We are constantly fed this idea that we “save” money when we place it in our 401(k) or similar vehicle. Money in 401(k)s is completely at risk, making it an investment rather than savings.

    Once Americans understand the difference between saving and investing, the mutual fund empire will cease to exist. People will protect their money instead of blindly throwing it at a stock market that has been outpaced by bonds for the past 30 years.