Peer Pressure Could Help Raise Deferral Rates

Several factors contributed to the changes Putnam will make to its plan participant’s home pages, says Edmund F. Murphy III, head of defined contribution at Putnam Investments. First, the use of social or peer comparisons is the next step in the evolution of the firm’s plan participant experience, Murphy tells PLANSPONSOR.

Using peer comparison to fine-tune the income projection analysis introduced in 2010 “is a recognition that people learn differently, so the whole idea of social comparison is so that people inside our 401(k) plans can see how well they’re doing,” Murphy says.

Participants are shown a projection of how on track they are for an adequately funded retirement. In addition to the percentage of total account balance that is funded, a sliding lever beneath allows a participant to make changes to the deferral rate to instantly see the effect of increasing contributions. They can also compare their progress in saving for retirement with others in their peer group, as well as the top-tier savers.

The initiative draws on social comparison behavioral theory, which holds that individuals are motivated by comparisons with peers who are top performers. Using data from the entire universe of participants in Putnam 401(k) plans, “How Do I Compare” will let employees in Putnam-administered defined contribution plans measure both their savings rate and potential income replacement in retirement with peers, based on criteria including age, salary and gender.

Importantly, employees can see how they compare with the top savers in their peer group. The feature allows the participant to gauge the impact of changes to savings rates and make immediate adjustments. “It ties back to income projection,” Murphy says, letting participants see how the action they take today can have an impact on their future.

Trying to motivate plan participants to save more was the catalyst, Murphy says. The average deferral rate of participants in plans that are recordkept by Putnam is less than 8%, according to Murphy, possibly 7.7%. “Our message is that we really want people to get to 10% or higher,” Murphy says.” That higher deferral rate tends to be one of the key characteristics of people in the top peer groups.

Top Behaviors

Murphy says a critical goal in creating this feature is to help plan participants understand the savings behaviors and characteristics of the top-decile savers.

The top savers save at a rate that is twice that of the median, says Steve Jenks, head of product and marketing for Putnam Investments Defined Contribution. Another driver was a question that customer service says they found difficult to answer, Jenks says. Plan participants often asked, “What are people like me doing to save for retirement? What could I do differently?”

The academic research on using peer comparisons helped with the concept, according to Jenks. “We knew a powerful driver is to show them what the best people are doing, and to give them an easy way to emulate that behavior,” Jenks tells PLANSPONSOR.

Dallas Salisbury, president and CEO of the Employee Benefit Research Institute (EBRI), says he finds the issue of peer pressure or peer review interesting, and points to the successful use of 12-step programs to treat alcoholism or drug use as a measure of their effectiveness.

“Using it in the 401(k) space falls right into the equivalent of what we’ve found in our 24 years of retirement confidence surveys,” Salisbury tells PLANSPONSOR. “The place people go for advice is friends and family: the ultimate in peer pressure or support.”

Putnam’s use of peer review in income projection is original, Salisbury feels, and he says it has potential for wider use.

“As we continue to have a savings crisis in this country, we feel very good about the average deferral rates in our plans,” Murphy says. “But we know there are plan participants not enrolled or not saving enough. Universally, the feedback [to the feature] is very positive, and we’re pretty excited.”

The new comparison lens is expected to be available within all Putnam 401(k) plans starting in April.