The Role of Information on Retirement Planning: Evidence from a Field Study

By Collins, J. Michael; Urban, Carly | Economic Inquiry, October 2016 | Go to article overview

The Role of Information on Retirement Planning: Evidence from a Field Study


Collins, J. Michael, Urban, Carly, Economic Inquiry


I. INTRODUCTION

Modern financial planning is dominated by discussions of one topic: retirement savings. Retirement planning behaviors are widely studied, yet, population data show perplexing patterns of savings, especially among households who reasonably should expect to live long and healthy lives after separating from the workforce. Savings choices are increasingly focused on the decisions of individuals, rather than on public plans or employer-mandated pensions (Poterba 2014). However, policymakers' attempts to stimulate more individual-level savings have not shown strong effects (Duflo et al. 2007). One problem appears to be related to people failing to fully plan ahead for retirement and neglecting longer-run financial management in general (Ameriks, Caplin, and Leahy 2003).

According to the Employee Benefit Research Institute (2015), more than one in four workers have less than $1,000 in retirement savings. Fewer employees today have access to defined benefit pensions than they did in the past, and instead rely on employer-based 401(k) savings accounts and nonemployer-based individual retirement accounts (IRAs) (Munnell 2006). However, participation rates remain low; 43% of private sector workers of age 25-64 take part in retirement savings programs (Calabrese 2011). Even among active savers, there are concerns about how well people are able to manage their retirement accounts in ways that reflect optimal planning horizons.

Several policies have been designed to increase participation in retirement plans. First, firm-level programs requiring employees to opt-out (vs. opt in) to a 401(k) plan have increased participation in retirement savings plans (Madrian and Shea 2001). However, as Choi, Laibson, and Madrian (2011) highlight, because individuals have heterogeneous savings preferences, these default options may be costly to individuals as some might save more in the absence of the default, and others might prefer to save less. Second, government-designed tax breaks for individuals investing in retirement accounts and increases in maximum income deferral limits for these accounts could increase retirement savings. However, income tax deductions and credits can be costly tax expenditures, and individuals, especially lower-and middle-income savers, may not respond to these incentives (Engen, Gale, and Scholz 1996). Third, firms can try to help people better understand their savings options and make plans for retirement, effectively lowering the costs of information with workshops and/or counseling. Retirement planning requires information in order to form expectations about lifetime income, years of work, expected investment returns (adjusted for risk), and consumption levels in retirement. People who lack information about these issues may fail to make a plan, or proceed to design a plan based on incomplete information. Educational programs targeted to workers hold promise to help people recalibrate their expectations and shift their savings behavior. Well-targeted financial education might facilitate people to pursue their individual retirement saving preferences in ways that default rules or incentives alone cannot.

This article studies the effect of financial education on retirement savings offered to employees in an online format. Online information offers several advantages over traditional seminars. For example, online courses can be delivered to a large audience and at a lower cost per participant than classroom delivery. It also poses relatively low marginal costs to the employee because of the flexibility and convenience of the mode of delivery; it may serve employees who would not attend in-person sessions. While participants in online education do not benefit from group interactions, online delivery provides participants privacy to explore financial issues that they might shy away from in more public settings.

Several studies document that employer-based education is associated with improvements in employees' financial knowledge (Clark and d'Ambrosio 2002; Holland, Goodman, and Stich 2008; Skimmyhorn forthcoming). …

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