Why don’t most Americans save enough for retirement? The reason may surprise you — and it has important implications for employers and retirement plan sponsors.
It’s not that people don’t understand the importance of saving — that message is regularly hammered home in newspaper and magazine articles, and employers work hard to educate their workers and give them the knowledge they need.
The real reason, researchers believe, is that people generally do not have a strong “emotional connection” with their future selves. They know rationally that they will need sufficient retirement income, but it is more of an idea than a strong feeling that might compel them to act.
Researchers affiliated with the Stanford Center on Longevity have found, for example, that when people think about their future selves, the neural patterns that are activated in their brain are, surprisingly, the same as when they think about a stranger. In other words, people have trouble putting themselves in the shoes of who they will be when they get older.
One common explanation for low savings is referred to as “hyperbolic discounting.” This is the notion that people place a higher value on money spent today than on the idea of deferring the spending until sometime far in the future. The reason is that the immediate spending provides a bigger psychological boost.
This is bad news for employee retirement programs.And plan sponsors may actually be contributing to the problem in the way they present their information: It may be difficult for participants to figure out how their 401(k) balances will translate into later retirement income. Even providing income projections — as some forward-thinking plan sponsors do — is unlikely to change savings behavior. What employers need to do is help their workers somehow establish an emotional connection with their future selves.
The researchers at the Stanford Center on Longevity devised an innovative approach to making just such a connection. In a series of experiments, some study participants interacted with 3-D avatars of their aged selves, and others were shown photographic renderings of their older selves. The researchers found that these participants were more willing to increase the amounts they would save for retirement than those who did not see versions of their future selves.
In one of the experiments, participants who viewed their age-enhanced photos were willing to put an average of 6.8% of their salary into their 401(k) plans, whereas those in the control group — who had not seen such photos — said they would contribute an average of just 5.2%. Another experiment found that participants who saw their future selves said they would contribute 6.2% of their savings, whereas the control group said it would contribute only 4.4%.
Plan sponsors that want to explore these kinds of techniques do not need to buy complicated 3-D software. Applications that automatically age photos are readily available and can be integrated into employee communications. A good example is Merrill Edge’s software, Face Retirement.
There are other ways to establish this kind of emotional connection. Political scientists, studying how to get people to vote, have discovered insights that are reshaping political campaigns. Instead of trying to reach voters primarily through “robocalls” and mass mailings, campaigns are now focusing more on activities at the community level so that voters can hear about a candidate from someone they know — and establish the emotional connection.
Retirement plan sponsors can apply this principle by organizing office-level workshops, which may prove more effective than glossy planning brochures. Such workshops will also provide an opportunity for employees to make the connection with their future selves.
Mercer advocates an approach that starts with a technical demonstration of the tools available to save more and plan for retirement. We suggest then asking workshop participants to imagine their financial needs in their old age. This takes advantage of “the planning effect” — another observation from political science researchers, who found that when people are asked to imagine how they will get to the voting booths, they are more likely to actually go. Participants can be asked to plan the steps they will take to meet their future financial needs, using the tools that have been demonstrated.
These approaches might also help people develop healthy habits. According to the book The Longevity Project, by Howard Friedman and Leslie Martin, the personality trait most closely associated with longevity is conscientiousness. People are more likely to eat healthy food and exercise if they are the type to stick to an action plan.
To help employees become more conscientious about their health, they might be asked to view two computergenerated “photos” of their future selves, side by side. One shows what they might look like in their 70s or 80s if they do not eat right and exercise, and the other how they will appear if they are vital, healthy, and fit. Making an emotional connection with their future selves — both healthy and unhealthy — could encourage employees to take better care of themselves.
Employers have long been frustrated by the limited ability of communication and education exercises to change employee behavior, particularly when it comes to saving for retirement and developing healthy habits. However, lessons from psychology, behavioral finance, and political science suggest that the answer lies not so much in the head as in the heart. And employers can play a key role. By incorporating “future self” tools and techniques into retirement and benefit programs, they can help workers prepare for a more secure future and lead healthier lives.
|For more information on retirement income adequacy, download the Mercer and Stanford Center on Longevity article series.|
|Fergal McGuinness (Zurich)
Senior Partner, Global DC Leader
+41 44 200 4528
|Amy Reynolds (Richmond, VA)
+1 804 344 2639