The ‘Mirage of Success’ Shimmering in Your 401(k)

A prominent behavioral economist had written a paper showing that if you send an e-mail to people about their credit card balance at the time they receive their bill, and if you let them know what the cost of maintaining credit card debt is, they were more likely to pay off their debt faster.

The economist said: “Let’s test that in your product. Let’s send people a note on Friday evenings about how much they can safely spend over the weekend.” Over the weekends, people blow their paychecks, build up credit card debt and buy things they shouldn’t. So, for four weeks, we ran this personalized e-mail alerting people to how much they could safely spend heading into the weekend.

What we found is that we systematically increased spending on the weekend. It had the opposite effect because we were basically giving people permission to spend. That was an example of something that worked in a laboratory but didn’t work in real life.

Some things did work. We tested another behavioral economist’s ideas on how to help people pay off credit card debt faster. The conventional wisdom is to start with the card charging the highest interest. That’s optimal from a mathematical point of view. We tested that alongside another group; we recommended to them that they focus on their card with the lowest dollar balance first.

The thinking there, from the behavioral economics world: It builds confidence if people can tackle low-hanging fruit. They feel a sense of accomplishment and then move on to harder problems. That sample paid off their debt two times faster compared to the sample that was focused on the higher-interest debt first.

Generally speaking, people are spending too much today and saving too little for tomorrow. We really, really aggressively experimented with lots of ideas about how to get people to increase savings. There are dozens of different ways we do that. And we’ve been very successful, increasing savings deferrals by $150 over a one-month period.

We help people build emergency savings. Across the U.S., 84% of the population doesn’t have three or more months of income saved in a liquid account. Just the knowledge we provided to people about all the negative consequences of not having emergency savings is very influential. In some cases, we’ll send emails letting people know what their emergency savings look like relative to people with the same income and education. That’s been effective for some employees. Also, there’s just the greater awareness we provide members on where their money’s going, and how much they need to save for things they want. They really can’t figure out how much to save for retirement or for health care if they don’t know how much they spend on groceries.