Adding choice to defaults in a retirement savings account

Background

In the United States, the lowest wage earners have limited access to retirement savings programs. According to the Bureau of Labor Statistics, of the lowest 10% of U.S. wage earners, only 34% had access to, and only 15% were participating in, employer-sponsored retirement savings programs. These statistics indicate low-income individuals are having a particularly difficult time saving for retirement.

We partnered with Self-Help Credit Union (SHCU) to help its members that are not currently saving for retirement. SHCU is a financial service provider that is focused on community development and the improvement of the financial well-being of its members. Many SHCU members are not currently saving for retirement.

Therefore, SHCU decided to create a new Retirement Savings Account (RSA) that serves as a substitute for traditional employer-based retirement plans. The RSA is funded using automatic contributions from checking deposits and contains a free $100 for all members who do not close the account or withdraw from it in the first year. We partnered with SHCU to test the efficacy of the RSAs at a branch in Western North Carolina.

Key Insights

Qualitative and quantitative analyses represented the foundation for our behavioral diagnosis. We conducted a series of eight in-depth interviews with SHCU staff, members, and one non-member. Additionally, we consulted relevant academic literature on defaults and reviewed historical savings trends for SHCU members.

Online surveys were also administered to measure preferences for product features such as product name, automatic contribution percentage, and withdrawal penalties.

The behavioral diagnosis led to two key insights.

• Many members lack or have limited plans for retirement. In our qualitative interviews, many members indicated that they suffered from a lack of planning or had no plans for retirement whatsoever. Members did not have specific retirement goals, and many were not currently saving for their retirement.

• Many members valued the ease and simplicity of automatic savings. The members were in favor of making the retirement savings process as easy as possible. The RSA allows members to save for retirement without changing any of their financial habits. After the RSA is established, savings will accumulate effortlessly and without much thought.

Experiment

We designed a simple experiment to test which way of presenting the RSA to members would lead to the greatest uptake and retirement savings. Members who were not currently saving for retirement and had just opened a new checking account with SHCU were randomly assigned to receive a simple default or a choice default. Participants presented with the simple default were told that 3% of all checking deposits would be transferred to their RSA. The choice default participants were asked to select between automatic transfer rates of 10%, 6%, or 3%.

Results

The RSA intervention was launched in June 2017. Through the end of June 2018, all eligible SHCU members were offered the RSA. Approximately 36% enrolled in the account and over 24% have maintained active accounts. Interestingly, members were marginally more likely to have opened the account and still keep the account active if they were in the choice-default rather than the simple-default condition. Further, members saved marginally more for retirement in the choice-default condition than did members in the simple-default condition. Across both groups, members have cumulatively saved over $25,000 for retirement during our intervention.

The Common Cents Lab is now working with Self-Help Credit Union to rollout the RSA to more branches and is currently designing an RSA 2.0 to test in 2019.