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401(k)s

How to Motivate Workers to Save More for Retirement

Strategies to encourage employees to build a brighter future.

Suzanne Shu, associate professor of marketing at UCLA. Courtesy UCLA

Suzanne Shu, an associate professor of marketing at UCLA, has done extensive research into why we save—and why we don’t. While studying for her PhD at the University of Chicago, she worked closely with Richard Thaler, who won the 2017 Nobel Memorial Prize in Economic Sciences for his pioneering research in behavioral economics.

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KIPLINGER’S: Saving in a 401(k) requires people to do something that may not pay off for 30 years or more. How can workers overcome the desire for immediate gratification?

SHU: Getting someone to put $10 aside right now that will pay off someday in the future versus buying something they’re in the mood for is a big challenge. Researchers at Carnegie Mellon University tried giving people a gift certificate for $50 when they signed up for a 401(k) plan. It led to a big boost in sign-up rates. The fact that such a small amount of money motivates people is contrary to economic theory, but that immediate reward makes people really happy.

Are there other ways to get people to save for the future? One of my colleagues, Hal Hershfield, showed college students images of their faces digitally altered to appear 40 years older. Students who saw their digitally altered selves said they would save about 30% more than students who were shown pictures of their current selves. The idea is that seeing your future self as someone more than a stranger builds a feeling of connectedness that makes you care about that future person. As a result, you’re more likely to want to save money.

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How are employers motivating workers to save more? The other thing that helps is to make it as easy as possible to save. That can include things such as tying an increase in your savings to a raise so you don’t notice the extra money that’s coming out of your paycheck. A lot of companies automatically enroll their workers in their 401(k) plans when they start a new job. People don’t fight back because saving for retirement is what they wanted to do anyway.

Savings rates are much lower for workers who don’t have contributions automatically deducted through a 401(k) or similar plan. How can we get these workers to save for retirement? That’s a big challenge, especially with the rise of the gig economy. Some of my colleagues are looking at whether we can encourage people to make a small daily deposit into a savings account—say, the cost of a coffee at Starbucks. That could add up to a lot of savings over time and it doesn’t feel like a lot at the moment you do it. I could imagine a world in which for every day Uber drivers work and earn income, $5 gets put aside in a savings account.

What are the biggest challenges facing people who have saved for retirement? Even if we’re successful getting people to save in a 401(k) plan, they land in retirement and have no idea how to manage it going forward. It’s been understudied because 401(k) plans are still pretty young. But with baby boomers retiring, all of a sudden figuring out how to manage those challenges is going to be a big deal. One solution is to convert part of the balance to an annuity so you have guaranteed income for the rest of your life. But taking your nest egg and handing it over to an insurance company—that’s a very hard behavioral decision. Some financial services companies are calling annuities a personal pension. The idea of framing it as a personal pension is really smart because a lot of people don’t like annuities but they like pensions.

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How has your research affected your own savings habits? The university system still offers a pension, but we also have a 403(b) and 457 plan. At the beginning of the year, I set the default to save as much as my plans allow. When the statements come in the mail, I try not to look at them other than to make sure money hasn’t suddenly disappeared due to an error or fraud. I don’t let myself get involved in second-guessing my investments. It’s better not to check those balances on a regular basis. I just let them grow over time.