November 25, 2002

UCLA Anderson Professor Develops an Effective Behavioral Prescription to Increase Employee Savings

Save More Tomorrow (SMT) program has increased the average employee's rate by nearly 10 percent

Recognized as one of the nation’s foremost experts on pension plans, Dr. Shlomo Benartzi, an associate professor of accounting at UCLA Anderson, jointly developed the Save More Tomorrow (SMT) program to ease employees into the often-complicated process of contributing to their employer’s retirement savings plan.

The program was created in response to a shift in the way companies are setting up their retirement plans. Prof. Benartzi explains that there has been a switch from defined benefit plans to defined contributions plans, causing employees to bear the burden for making decisions about how much to save. The SMT program grew out of studies suggesting that many people want to save more, but often put off hard decisions that would allow them to do it.

Dr. Benartzi said that employees who decide not to join their companies’ plan or save very little appear to be saving at less than the predicted life-cycle savings models. He says that the choices made by employees reflect bounded rationality and lack of self-control, and his research suggests that at least some of the low-saving households are making a mistake.

The Save More Tomorrow program was designed by Prof. Benartzi and Prof. Richard H. Thaler of the University of Chicago and is outlined in the paper “Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings,” which is slated to be published in Journal of Political Economy. Their research investigates participant behavior in defined contribution plans, examining:
How participants make investment choices in retirement saving plans.
How plan participants and plan sponsors view company stock.
The role of plan design on participant behavior.
How employee saving rates can be increased.

Specifically, SMT enables employees to pre-commit to contribute a specified percentage of an upcoming pay increase to their retirement plan. With each subsequent pay raise, their contribution rate as a percentage of their salary would continue to rise.

“The basic idea is to give workers the option of committing themselves now to increase their savings rate later, each time they get a raise,” Prof. Benartzi said. “People commit in advance to allocate a portion of their future salary increases toward a better future.”

After several organizations implemented the plan, the professors reported key findings suggesting that SMT is extremely effective:
Most people (78 percent) who were offered the SMT program elected to use it.
Eighty percent remained in it through the third pay raise.
The average saving rates for SMT participants increased from 3.5 percent to 11.6 percent over 28 months.

Profs. Benartzi and Thaler are currently working on additional “behavioral prescriptions” to help employees better diversify their retirement portfolios. Their latest working paper is called: “Sell More Tomorrow: Using Behavioral Economics to Increase Employee Diversification.”

Prof. Benartzi, a member of UCLA Anderson faculty for six years, recently received tenure and was promoted to associate professor of accounting. He has served on the U.S. Department of Labor’s Employee Retirement Income Security Act (ERISA) Advisory Council. He has also conducted extensive research in the area of company stock as a 401(k) investment.

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