Simplicity and Nudges Can Help Employees Become Habitual Savers

The reasons people start saving for retirement can inform plan advisers and sponsors about educational nudges and plan design.

The Aegon Retirement Readiness Index (ARRI) measures retirement preparedness on a scale from 1 to 10 with scores of 8 and higher considered to be high retirement readiness, scores of 6 to 7.9 as medium, and less than 6 as low.

In the nine original countries where Aegon has been measuring retirement readiness since 2012, the ARRI increased from a score of 5.2 to 5.5 in 2016. This increase has been largely driven by positive movements in people’s feelings about planning and saving, yet it should be noted that this increase has been offset by a decline in people’s feelings of personal responsibility for providing sufficient income in retirement.

Countries such as the United Kingdom and the United States have made the greatest progress in retirement readiness since 2012. The presence of well-developed third pillar pensions, in the shape of workplace defined contribution plans such as 401(k) plans in the United States, means that people have greater personal ownership over their retirement plans.

New research from Transamerica Center for Retirement Studies (TCRS) in collaboration with Aegon Center for Longevity and Retirement (ACLR) titled “A Retirement Wake-Up Call: The Aegon Retirement Readiness Survey 2016,” illustrates the importance of habitual saving and opportunities that can nudge or inspire non-savers to start saving. Thirty-eight percent of workers describe themselves as habitual savers (those who say they are always saving for retirement)—54% of U.S. respondents describe themselves as habitual savers. Habitual savers are seven times more likely to achieve a high ARRI score than the non-savers (37% compared to 5%).

NEXT: Offering ‘nudges’ to save, and making it easy

The reasons people start saving for retirement fall into two broad categories: "life stage" (47%) and "employment-related" (39%), the study finds. For example, 32% reported they started to save because they turned a certain age, and 16% said it was because they started a family. Sixteen percent said they started saving because their employer started contributing to their retirement plan, and 14% said they were automatically enrolled in their employer’s retirement plan. Nine percent reported they started saving when they got a pay raise.

The research report suggests this information shows an opportunity for employers to ‘nudge’ people into saving for retirement. For example, milestone birthdays could be a good opportunity to share with workers the need to save for retirement. Some people seek financial advice when taking out or re-mortgaging their home, which is a potential opportunity for advisers to introduce other savings options such as retirement planning products. Major lifestyle changes such as having children may encourage people to consider their long-term finances, and present another possible opportunity to engage them in discussions about retirement.

In addition, the report says, convenience and making it easy to save should be key features of any sustainable retirement system in which people are expected to play a role in financing their old age.

Around two-thirds of workers globally (65%) find the idea of automatic, default arrangements that enroll them into a retirement savings plan based on a contribution level of 6% of annual salary to be very or somewhat appealing. In the U.S., 75% of workers find the idea appealing.

Even when the survey inquired about higher contributions at 8% of salary, it still found broad support, with 61% of workers globally finding it appealing. In the U.S., 72% did.

NEXT: The need for retirement and financial education

Currently, many workers are neglecting to make any kind of financial plan for retirement. Workers with a retirement strategy are more realistic in preparing for retirement and achieve a higher ARRI score than those without a strategy, yet 38% globally do not have a retirement plan. Among vulnerable groups, the proportion of those without a plan increases to 42% among women and 49% of those on low incomes.

Financial backup plans that help people deal with the unexpected are largely absent, the research finds. More than half of people with such plans (58%) say their savings are included in their backup plans. People overlook the benefits of insurance products as more cost-effective means of protecting their health and income, the report suggests.

Individuals need help and advice when it comes to planning for retirement and, among other options, many turn to friends and family who may not be the most expert source of information.

In addition, the survey findings reveal a widespread reliance on savings accounts as a possible route to retirement income. With interest rates expected to remain low in many countries, there is a need to guide people toward better asset allocation decisions both in saving for retirement and the decumulation phase.

The full research report is here.