Academic journal article The Journal of Consumer Affairs

A Framework for Promoting Retirement Savings

Academic journal article The Journal of Consumer Affairs

A Framework for Promoting Retirement Savings

Article excerpt

This article identifies the constructs that influence an individual's intention to save for retirement and discusses how and when these factors can be changed by an agent trying to induce an individual to enroll in a retirement plan, increase his or her contribution to a plan, or purchase a particular retirement product. A broad array of psychological theories is used to develop a series of persuasive communications that can encourage a person to save. In addition, the persuasive communication approach is placed in the broader context of all efforts used to promote retirement savings.

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Many Americans are not saving enough for their retirement. According to the 2007 Retirement Confidence Survey (Helman, VanDerhei, and Copeland 2007), only 66 percent of workers report that they and/or their spouse have saved money for retirement and only 60 percent report that they are currently saving. Even among those who do save, savings can be insufficient. About half of all workers saving for retirement report that the total value of their investments, excluding their home and their defined benefit plan, was less than $25,000.

Because this problem has been well known for many years, both private agents and public policy makers have made numerous efforts to increase the extent to which American workers save for retirement. Basically, two broad approaches, the first structural and the second involving communication, have been used to do this.

Structural approaches attempt to change the conditions under which people save. For example, policy makers can alter the financial conditions associated with retirement saving (e.g., enhance tax benefits or raise retirement plan contribution limits), while employers can rework plan design (e.g., institute matching, enrollment by default, or automatic contribution increases). In contrast, communication approaches focus on changing both workers' knowledge and their perceptions. The former occurs through education (e.g., teaching the fundamentals of investing); the latter occurs through persuasion (e.g., creating normative pressures or enhancing the perceived importance of one's retirement years).

Past policy efforts have focused on structural changes and on education. For example, the most recent effort, the Pension Protection Act of 2006, contains several favorable retirement savings measures, including allowing employers to offer automatic enrollment plans as the default and permitting plan providers to offer certain investment advice without running afoul of advisor conflicts of interest. However, 42 percent of all working-age wage and salary employees do not work for an employer or union that sponsors a retirement plan (Copeland 2006) and therefore will not be affected by either of these changes. Moreover, these changes may not be sufficient even among workers who have access to employer-sponsored plans. A recent study by VanDerhei (2007) suggests that automatic enrollment will not be a magic bullet: although replacement rates (the percent of final salary that is replaced in retirement) will increase, they will still be below the traditional minimum recommended replacement level of 70 percent. (1) In addition, some experts doubt that automatic enrollment plans (even for new employees) will rapidly diffuse (Laise 2007). (2) The effects of the educational change (investment counseling) are also problematic: despite some successes, the impact of past employee educational programs on participation and contribution rates has been disappointing (Benartzi and Thaler 2007). Thus, the evidence suggests that although these structural and educational efforts have been and are valuable, there is a need to do more.

In this article, we focus on the role that can be played by persuasive communications. To depict the role of persuasive communications, we use a policy framework. The framework is constructed from the point of view of an agent who is trying to get an individual to join a retirement savings program (e. …

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