Default Stickiness, Low-Income Employees, & Considerations for Designing AutoSave

The George Washington University School of Business and the Federal Reserve Board host a Financial Literacy Seminar Series  which bring together academics, policy makers, practitioners, and other experts interested in research on financial education and capability building.  Tuesday’s session featured Brigitte Madrian from the Harvard Kennedy School whose research is a cornerstone for our understanding of household saving and investment behavior, especially in retirement planning.  In her lecture, Dr. Madrian discussed some of her newest research on the persistence of defaults in employer-sponsored savings plans which found that defaults are more influential for low-income employees than for high-income employees.  In other words, when low-income employees are enrolled into a savings program, they are more likely to stay with the program even if the terms are unfavorable for them.  Dr. Madrian reported that her team believes this is because low-income employees tend to face more barriers to making an active situation, such as fewer means to help overcome procrastination or a lack of relevant knowledge to make better financial decisions.  The results of this study are consistent with other past studies that show low-income individuals are more likely to stay with a default. 

As a discussant to Dr. Madrian’s presentation, Louisa Quittman from the US Department of Treasury stated that given the stickiness of defaults with lower-income populations, the Office of Financial Education and Financial Access is taking care to ensure that their program and policies to further encourage financial capability among Americans are well tailored to the consumer.  A call went out to the researchers in the room to continue doing work that can guide that process. 

Dr. Madrian’s presentation and Ms. Quittman’s call to action is directly in line with the work the New America Foundation and MDRC are doing on the AutoSave pilot.  In AutoSave, we’re trying to see if there are ways to make saving easy for low-income employees through their workplace.  In the first phase of the pilot – which has been ongoing for two years – we created programs that made it easier to split a portion of one’s wages to a savings account by simplifying the enrollment process into direct deposit and opening a savings account.  In the second phase of the pilot – which is current being designed – we’re trying to create a program where employees are automatically putting a portion of their wages into savings, unless they choose not to do so.  Since low-income employees are more likely to stick with the way a program is designed, we’re putting great importance on considering the potential needs, preferences and behaviors of AutoSave participants into mind when setting the program specifications.  For example, the savings products used in AutoSave are unrestricted, meaning they can be withdrawn when needed, because our preliminary research on the savings needs of low-income households revealed that building emergency and precautionary savings is their most important savings priority. 

Through this pilot, we hope to not only be able to provide learning and best practices for establishing workplace savings programs, but also to provide guidance to policy and program designers on how to make sure that devised plans fit well with the lives of those they hope to serve.  A one-page overview of the AutoSave pilot program is available here and updates on the pilot and its results will be available here as they are released.