Motivating people to save for retirement isn’t easy. Fraught decisions around when to start a nest egg, how much to set aside, and where to invest can be so overwhelming that inertia often sets in.
Increasingly, economists who study this paralysis have shown that minimizing the complexity surrounding retirement choices inspires workers to start saving — and at higher rates.
New research from Jacob Goldin, a faculty fellow at the Stanford Institute for Economic Policy Research (SIEPR), has shown the adage “the simpler, the better” when it comes to retirement planning. In a study to be published in the peer-reviewed Journal of Public Economics, Goldin, along with collaborators Tatiana Homonoff, Richard Patterson, and William Skimmyhorn, looks at a demographic with a poor track record of retirement saving — U.S. military service members — and shows how a single step can drive enrollments in workplace retirement programs.
The study authors find that people are more likely to sign up for an employer-sponsored savings plan when urged to begin contributing a specific percentage of their income. They show that the mere suggestion of a contribution amount — and not the amount itself — led to a 26 percent increase in the likelihood that a service member would enroll in the military’s version of a 401(k).
“Our results show that just giving somebody a number — no matter what the number is — can be a helpful step in encouraging them to participate in a retirement plan,” Goldin says. The results also suggest that having to choose whether to contribute 3 percent, 4 percent, or 6 percent of a paycheck can be too much for some people.
“Even though they know they should be saving some amount,” he says, “when faced with a complicated choice they end up throwing their hands up in the air and don’t save anything at all.” According to the Economic Policy Institute, the number of families participating in retirement plans has steadily declined since 2001.
The direct link that Goldin, who is also an associate professor at Stanford Law School, finds between including a contribution rate and a resulting uptick in plan sign-ups adds to a growing body of research showing that policies and programs that simplify the retirement planning process improve savings rates.
“Our research provides some of the first causal evidence that the complexity of retirement planning decisions can be a major barrier to saving,” Goldin says. Co-authors Homonoff, Patterson, and Skimmyhorn are assistant professors of economics at, respectively, New York University’s public service school, the United States Military Academy at West Point, and The College of William & Mary’s business school.
Inspiring a hard-to-reach demographic
In 2016, Goldin was working as a legal advisor in the Treasury Department when the research opportunity arose as part of a broader effort by the Department of Defense to address the problem of very low participation rates in the military’s retirement program. Only 43 percent of service members were enrolled in its Thrift Savings Plan (TSP), as it is known, versus 87 percent of civilian federal employees.
The study covered nearly 300,000 active army personnel who were not participating in the TSP despite being eligible to do so for an average of six years. The idea was to see how these service members — who tended to be younger, less educated, and racially diverse — would respond to one of two types of emails urging them to sign up.
The study participants were divided into three groups: A control group that did not receive any communication; a second that received a message encouraging them in general terms to enroll; and a third that got the same email as the second cohort, but it included a specific contribution rate. These service members were given a number ranging from 1 percent to 8 percent in order to rule out the possibility that the rate itself — rather than the simple act of including one, no matter the amount — drove any increase in participation.
The researchers found that 2.7 percent of the control group signed up for the TSP within the first three months of the experiment. Sending a general encouragement email increased the likelihood that a servicemember would join the TSP by 0.4 percentage points. The email identifying a specific contribution rate boosted the probability of enrollment by 0.7 percentage points.
The results are statistically significant, Goldin says. Those who were simply urged to participate were 15 percent more likely to do so. The probability that those who received the extra nudge of a highlighted percentage rate would sign up was 26 percent. These members were also more likely to contribute more of their paycheck than those who did not receive any communication and those who did not get a highlighted rate.
Moreover, Goldin and his collaborators report that the increase in participation rates persisted throughout the two-year study period. This suggests that including a contribution rate did not motivate service members who would have signed up anyway to do so sooner. Instead, it inspired members who otherwise might not have enrolled.
“It’s significant that we are seeing any improvements at all, because this is a hard-to-reach group that has been resistant to saving in the past,” Goldin says.
Simplifying, cheap and easy 
One key drawback is that the researchers do not know how many service members who were sent either of the two emails actually opened or read them.
The authors cite prior research estimating that less than 6 percent of active duty soldiers opened a Department of Defense message about a different financial services program. Based on that open rate, Goldin and his co-authors conclude that participation rates among members who received both emails would have risen overall by 7 percent and 13 percent.
“To the extent that some people just saw the message and deleted it or missed it altogether,” Goldin says, “the effects we are measuring would be even bigger.”
Goldin says the research has important implications, not just for the U.S. military, but for all employers that offer workplace retirement plans. “The type of policy we identify is not going to solve the problem of under-saving,” he says. “But it shows how simple, low-cost steps can reduce the complexity of retirement planning and increase participation in savings programs.”