George Fraser and Shlomo Benartzi: The Power of Pennies

Cover Story: How the elite advisor and behavioral economist are using “change” (instead of percentages) to dramatically change participant outcomes

A small change to the way saving for retirement is framed can have a very large impact on participant outcomes.

Advisor George Fraser and famed behavioral economist Shlomo Benartzi are on a mission to demonstrate to the retirement saving community—from 401(k) plan participants and plan sponsors to advisors and recordkeepers—that making a change as simple as using the word “pennies” instead of “percent” when talking about deferral rates with participants can make a huge impact in the long run.

It’s an idea that needs more exposure, which is why Fraser was interested in talking with 401(k) Specialist about it. Fraser, the Managing Director of Fraser Group at Retirement Benefits Group in Scottsdale, Ariz., and an advisor serving roughly 10,000 401(k) participants in 35 plans with plan assets under advisement of approximately $450 million, says all of his plans utilize automatic enrollment and auto escalation based on Benartzi and Nobel laureate Richard Thaler’s groundbreaking “Save More Tomorrow” retirement strategy that uses behavioral nudges to get people to save more by gradually increasing deferral rates over time.

• EDITOR’S NOTE: This article first appeared as the cover story of recently released  401(k) Specialist MagazineIssue #1 2023. Click here to read it as it appears in the digital edition of the magazine.

Fraser has found remarkable success by employing his “Pennies on the Dollar®” strategy, where he encourages reluctant participants by telling them they can build a retirement nest egg by socking away as little as one penny from each dollar of earnings, and increasing it by a penny each year until it hits at least six pennies of every dollar. The key here is how participants have reacted very positively to messaging using “pennies” as opposed to the standard “percent.”

The words advisors choose really matter for participant outcomes, and Fraser wants the industry to cut the jargon and speak in terms average Americans understand.

“This is about doing the right thing and changing the dynamic,” Fraser said. “This is a place that you can clearly help change the industry.”

Research on his model by Benartzi and his team at UCLA, Carnegie Mellon and Cornell has shown that 401(k) participants are saving around 20% more under the “Pennies on the Dollar” approach than they would be if they were presented with deferral rates in terms of percentages.

Which Fraser said begs the question, “Tell me why every provider in the country is not using pennies as opposed to percent?”

Fraser thinks a lot about how to approach participant education and communication strategies to achieve the best outcomes for participants, such as incorporating Social Security into the discussion and de-emphasizing industry jargon such as “decumulation.” He believes average Americans get confused by words commonly used by advisors and plan sponsors, so he changed the words he used to make saving for retirement easier to understand.

“It’s something that I was anxious to share with the industry, and if I can help make a difference to the average participant because we start speaking in terms that they understand, that feels pretty good,” Fraser said.

For virtually the first 15 years of his 30-year career, Fraser and his team were out setting up one-on-ones for every single participant. And they’d take plans from very low participation rates to “high 90s always,” while also increasing deferral rates. “But it was always this whole issue of how people didn’t really understand the lingo that we use—we use so many acronyms and things.”

The concept of using pennies instead of percentages instantly resonated with him, and he recounts the story of a casino client in California where he used the approach several years ago.

When he first got the account 15 years ago, the casino would only auto-enroll new employees, and did so at just 2%.

“So about 8 years ago I went in there and said, ‘You know what? Let’s get rid of that.’ I threw a bunch of pennies on the floor. Then we picked them up in the meeting, and I said, ‘Let’s go to just one penny on the dollar since you don’t think they’re that important for every single person. And then we’ll increase it by an additional penny every year. They had a good laugh at it, but they agreed to it. Well, 8 years later, they ended up with 9.7 pennies on the dollar and 98.6% participation. With no company match.”

Benartzi Takes an Interest

After hearing the revered Benartzi speak to his usual crowd of adoring advisors at an industry event several years ago, Fraser sought him out afterwards and told him about his concept of changing words.

“He said, ‘Look, I’ve been using pennies and it works better than percent,’” Benartzi recalls of the meeting. “Did you test it?” he asked Fraser. “He said yes, but not as a scientist. ‘But I can tell you it seems to work!’ I was like, ‘Why don’t we go and test it then?’”

Fraser wasn’t so sure Benartzi was interested. “He said, ‘That’s interesting George… I’ll get back to you.’ I thought it was a blow-off,” Fraser recollects.

The very next day, someone from Benartzi’s team contacted him, saying, “Shlomo likes this, he’d like to do research.” So for the next 3½ years, they did research on it with the help of UCLA, Carnegie Mellon and Cornell—paid for by the Voya Behavioral Finance Institute for Innovation, where Benartzi serves as a senior academic advisor (in addition to his duties as professor emeritus and co-founder of the Behavioral Decision-Making Group at UCLA Anderson School of Management and Distinguished Senior Fellow at the Wharton Behavior Change for Good Initiative).

As part of the research, Steve Shu, Hal Hershfield, Richard Mason and Benartzi tested Fraser’s novel intervention. “Instead of featuring the savings rate as a percentage, they described it in terms of pennies per dollar earned. For example, a 7% savings rate would be expressed as saving ‘7 pennies’ for every dollar earned,” Voya’s “Reducing the Savings Gap” research noted.

The studies revealed pennies reframing significantly impacts behavior—especially for lower-income participants.

From the Voya paper: “Most notably, it dramatically reduced the income savings gap, as those workers in the lowest income group (with an average income of $32,000) boosted their savings rate by 115 basis points. In the percent condition, low-income workers had an average savings rate of 6.88%; in the pennies condition, workers had an average savings rate of 8.03%. To put this in perspective, this savings rate is nearly as high as the savings rate of participants in the highest income group, who saved 8.5% of their salary. (These higher income workers had a mean salary of $115,000.)”

Further analysis from the research reveals that workers with less than $50,000 in annual salary are the ones most helped by pennies reframing.

“If you think about it, the Google engineer is not really affected by whether it’s 6 pennies or 6% because he’s pretty good with numbers. But it might be that the barista at the local coffee shop is really affected by it, in saving more with the pennies because he’s not good with percentages,” Benartzi said of the research. “So it closes actually quite a bit of the gap in saving behavior between low- and high-income, and that obviously helps with non-discrimination testing. It helps with goals that a lot of employers have about societal gaps and obviously policymakers might also care about it.”

While this savings increase caused by pennies framing might seem modest, the paper states that, “if implemented over the entire accumulation phase it would represent a boost of close to 20% in retirement income for those in the lowest income bracket.”

And Fraser believes the actual increases in savings rates is even higher. “I’ve seen what has happened in my own accounts, and the numbers are significantly higher,” Fraser said.

NEXT PAGE: Don’t Forget Social Security