Pennies or percentages? Presenting retirement options to help your employees save more

For many workers, retirement plans can feel like a minefield of baffling terms. From 401(k) to 403(b) and Roth IRA, just attempting to understand available options can create confusion that can impact an employee’s ability to build a comfortable nest egg.

That could mean trouble for the future. One 2017 study by the Center for Retirement Research predicted that, compared to previous generations, a larger share of retired Gen-Xers and millennials will be unable to replace at least three-quarters of their pre-retirement earnings, putting them at greater risk for financial insecurity during their twilight years. Another 2021 study of Gen Z workers by Empower Retirement found that while retirement plan enrollment among this group outpaces that of other generations, their savings rate averages 6% — lower than any other group.

Amid a wealth of literature documenting retirement savings gaps across income, race and gender, Voya, a financial services company, aims to help workers better understand the benefits of saving for retirement. Last month, the company released findings from ongoing research determining the impact of different ways of framing retirement plans on the savings behavior of lower-income employees making an average of $32,000 per year.

Read more: Retirement savings hit record rates despite great resignation

Researchers found that when retirement plans were presented to employees traditionally, as a percentage of their overall paycheck, workers saved an average of 6.9%. But when retirement plans were framed according to how many pennies employees could choose to save for every dollar earned, the average savings rate jumped to 8.0% — nearly as high as the 8.5% average savings rate among employees in the highest income bracket.

Changing the way retirement information is presented to employees “has the potential to boost retirement income by almost 20% if implemented throughout the entire accumulation phase of one’s career,” Shlomo Benartzi, a senior academic adviser to the Voya Behavioral Finance Institute for Innovation, said in a release. “More importantly, it reduces long-standing societal gaps in savings behavior, making it easier for lower-income employees to better prepare for retirement.”

Reframing the discussion around retirement plans to focus on pennies saved could have major implications in empowering workers to build a more financially secure post-retirement foundation, especially as more Americans continue to leave the workforce earlier.

Read more: Saying goodbye to the 9-to-5: How these employees are retiring decades ahead of schedule using FIRE

As of late 2021, the Pew Research Center found, just over 50% of US adults aged 55 and older had retired. Meanwhile, a quarter of Gen Z respondents to a new survey by Goldman Sachs Asset Management said they plan to retire before the age of 55. If the traditional retirement timespan expands this much for a generation, every penny will count.

Voya also recommends that employers and advisers harness the power of information architecture beyond the retirement discussion, giving workers the option to allocate pennies to emergency savings, health savings accounts and employee benefits, creating more insulation across different stages of life. Over time, Benartzi said, “helping people save just a few pennies more can add up to thousands of dollars of retirement security.”