Save More Tomorrow

As firms switch from defined benefit plans to defined contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan, or who participate at a very low level, appear to be saving at less than the predicted lifecycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake, and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocate a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has been in place for four annual raises, are the following: (1) a high proportion (78 percent) of those offered the plan joined; (2) the vast majority of those enrolled in the SMarT plan (80 percent) remained in it through the fourth pay raise; and (3) the average saving rates for SMarT program participants increased from 3.5 percent to 13.6 percent over the course of 40 months. The results suggest that behavioral economics can be used to design effective prescriptive programs for important economic decisions. Richard H. Thaler* Shlomo Benartzi∗ University of Chicago The Anderson School at UCLA Graduate School of Business 110 Westwood Plaza 1101 E. 58th St. Los Angeles, CA 90095-1481 Chicago, IL 60637 TEL: (773) 702-5208 TEL: (310) 206-9939; FAX: (310) 267-2193 E-mail [email protected] E-mail: [email protected]  We are grateful to Brian Tarbox for implementing the Save More Tomorrow plan and for sharing the data with us. We would also like to thank many people at the following companies for their help: Financial Engines, Hewitt Associates, Ispat Inland, John Hancock, Philips Electronics, and the Vanguard Group. Jodi Dicenzo, Bill Sharpe, and Steve Utkus deserve special thanks. We are also grateful for comments from David Laibson, Brigitte Madrian, Casey Mulligan, Ted O’Donoghue, and Cass Sunstein. Benartzi would like to thank Reish Luftman McDaniel & Reicher for financial support. Save More Tomorrow is a registered trademark of Benartzi and Thaler, but the plan is available at no charge to any company that is willing to share data on the outcomes. This paper is dedicated to Sherwin Rosen, Thaler’s thesis advisor. Thaler would not be an economist today if not for Rosen’s help. The usual disclaimer, assigning none of the blame for errors to those thanked above, applies in spades to Sherwin. He would not have liked this paper much, but we sure would have enjoyed hearing him complain about it!