Building A Better Retirement Nest Egg: Lessons From A Middle School Science Experiment

By: Julie Agnew
Julie Agnew is the Class of 2018 Associate Professor of Finance and Economics at the College of William and Mary’s Mason School of Business.

This spring, my son was given the popular “egg drop” science assignment. Several weeks before it was due, he discussed elaborate ideas and hoped that his egg would remain intact for extra credit. Yet, at the same time, the deadline was enough in the distant future that he felt no urgency to begin testing his ideas. It wasn’t until the weekend before that he began working in earnest jettisoning prototypes from our porch. In the end, he knew the extra points would have been more likely if he had started working earlier.

Photo by Tanja Heffner on Unsplash

Surprisingly, his experience provides lessons for retirement savers and also serves as a simple example of behavior consistent with temporal construal theory, the focus of a paper I recently coauthored with Nicole Montgomery and Lisa Szykman.

While construal theory has been studied in multiple contexts, very little work on the approach has been done in the area of retirement. Our study explores how designing retirement plan communications and goals with temporal construal theory in mind can strengthen younger workers’ intentions to save.

What is Temporal Construal Theory?

The premise of temporal construal theory is that people tend to view things differently depending on whether they believe an event will happen in the near or distant future. This is explained by researchers Trope and Liberman who argued that challenges farther off in time are perceived in a general or abstract way, so people devote less attention to how to confront them. Yet as the challenge draws near, the theory predicts that people start to think more concretely about the specific steps needed to achieve the desired outcome.

This explains why my son initially focused more on the desirability of the extra credit but less on the practical execution of the assignment. He only began to focus on how to design a better vehicle when the eggs started breaking all over our lawn.

We draw a parallel in the retirement saving context when we see that younger workers save less for retirement than older workers. That is, retirement seems far away to the young, whereas those seeing retirement approaching are prompted to think concretely and start saving. Construal theory makes sense as a rationale for this behavior.

Our Study

Our study asks whether communication strategies aligned with how individuals think about retirement can boost saving. For instance, younger workers should respond better to abstract advertisements versus concrete ones. We can alter how distant retirement seems by changing the savings objective from a long-term to a near-term goal. If we are successful at this, communications may motivate even younger workers to save.

To test these hypotheses, we ran two online experiments. The first provided concrete and abstract advertisements to younger and older workers in the context of long-term savings goals. The concrete ad enumerated specific steps for retirement saving, while the abstract ad provided similar but less tangible advice. Both ads included a table at the end which mapped different salaries to final long-term savings goals. After showing people these ads, we recorded how much they said they would boost their savings.

The second experiment was limited to younger workers. Again, participants were given the same abstract and concrete ads, but now the final contribution tables differed. One version provided the same long-term (45 years) contribution target table used in the first experiment, while the other provided short-term (bi-weekly) contribution goals. We believed that showing people bi-weekly goals would convert the retirement savings decision into a short-term problem.

Our Results

What we found was that younger people responded strongly to long-term saving goals when shown the abstract advertisement. That is, the young said they intended to increase their savings rates more after seeing the abstract ad, targeting to pay an additional 6% of their pay versus 3% with the concrete ad. Yet we also found that the concrete ad became more effective when short-term contribution goals were introduced. That is, participants indicated that they would save an additional 4% of pay given the abstract ad, versus 13% of pay when shown the concrete ad. Moreover, the savings boost was highest overall with the short-term and concrete communications treatment.

Our research implies that plan sponsors may wish to tailor communications to their target audiences, and that younger workers are likely to respond differently than older employees. Additionally, reframing the retirement savings decision into a short-term savings target for the young offers the opportunity to encourage even more retirement saving.

Naturally our findings should be field tested. Nevertheless, the evidence is promising and suggests new ways to increase savings among the young. Given the challenges facing our aging economy, this could help ensure that our retirement nest eggs don’t crack.


This piece was originally posted on May 15, 2017, on the Pension Research Council’s curated Forbes blog. To view the original posting, click here.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.