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.”
“Tell me why every provider in the country is not using pennies as opposed to percent?”
George Fraser
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.)”
“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.”
Shlomo Benartzi
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
Don’t Forget Social Security
When he does his presentations, Fraser often walks into a room and holds up a lottery ticket. “Everybody knows what it is,” Fraser said, noting that the average family that makes $40,000 a year or less might spend $1,000 a year on lottery tickets. “The reason they do it is because they’re hopeful. They think, ‘there is a chance I could win. In my retirement, my life will be looked after.’ We know that’s not true,” Fraser added, noting it’s something like a 1-in-292-million chance.
“Let me tell you about the lottery ticket you’ve already won, and that’s Social Security.”
George Fraser
The next thing he talks about is, “Well, since you’re not going to win, let me tell you about the lottery ticket you’ve already won, and that’s Social Security.”
Fraser figures that around 90% of people who are age 65 have $60,000 or less in their 401(k) plan. Talking to leaders at some of the top recordkeepers, Fraser made this statement and asked if they would agree. “Guess what they said? ‘The percent is higher and the number’s lower. It’s between $30,000 and $60,000.”
Then you think about how the market dropped in 2022, lowering account balances for participants. “Here’s a person who had $60,000 in their account on Dec. 31, 2021. And now they have $48,000 because the market’s gone down, say 20%. They get upset and think, ‘What should I do next?’ Go to cash, some sort of fixed account? You get on the phone with that person and they’re very upset. You say, ‘Well let’s take a look at your portfolio. What do you think you have?’”
People tend to forget about Social Security—or they’ve been conditioned by politicians, the media or even the retirement industry not to count on it. They might say, “I had $60,000, but now I’m at $48,000.”
“Well, that’s not what you had,” Fraser replies. “Worst-case scenario, you have $250,000 in Social Security at age 60, so that’s $310,000 and you’re down $12,000.” And by the way, Fraser points out, that $250,000 is a fixed account—it’s not going down. In fact, it went up last year with the 5.9% cost-of-living adjustment (COLA), which went up to 8.7% for 2023.
“Do you know what happens when you have that conversation? People say, ‘Oh my gosh, you’re right, George. I hadn’t thought about it that way.’ Because all we do is focus on the plan so often. I think it’s a really important piece that we need to spend more time on.”
Fraser notes that if you think about the way a general retirement presentation goes, it often starts out with something like, “Social Security may not be there for you, so unless you’re saving 15%, you’ll never have the million-dollar account—and therefore look like the people on our brochures.”
This drives him crazy.
“It’s a bunch of baloney. And that’s what we feed to all these average Americans every day,” Fraser said. “And the bottom line—it’s not true. No one says you have to be wealthy. You really need to find a place to cover your expenses and have some fun opportunities sometimes.”
He likes to remind participants that even $1,000 a month in Social Security payments between age 65-85 equates to a quarter of a million dollars. And it’s a lot more than that when you consider the average monthly Social Security benefit was $1,681 in 2022, and it jumped to $1,827 in 2023 thanks to that 8.7% COLA increase.
Benartzi pointed out that only 9% of Americans delay claiming Social Security in a meaningful way. He cited a recent paper from the National Bureau of Economic Research that found people leave a median household loss of $182,370 on the table by not waiting until age 70 to claim—and over 90% should wait until age 70 to claim but only 10% do so.
“You don’t have to claim when you retire. Most people don’t know it,” Benartzi said, adding that among people following his strategies, 60% delay claiming.
Because of the high value of waiting to claim, the research concluded workers should do everything they can to delay, including withdrawing from retirement accounts before tapping Social Security.
NEXT PAGE: The Longevity Puzzle Piece
The Longevity Puzzle Piece
Another part of the equation when it comes to helping participants with decumulation is having an informed idea about a participant’s longevity.
“Most companies believe that everybody’s going to die at 95—no matter your health status, etc.,” Fraser said. “I love the industry, but this is the kind of stuff that drives me crazy.”
Benartzi, on the other hand, drills down quite a bit deeper to come away with a more concise expectation about individual longevity. Using a variety of studies combined with a few questions for the participant, he is able to come up with a much more individualized estimation of mortality than the “everybody’s going to die at 95” approach.
The questions include where the participant lives, if they smoke or not at age 65, and then the most impactful question: “Do you consider yourself in poor, average, good, very good or excellent health?”
The difference between “poor” and “excellent” is 7 years, Fraser noted. Armed with this information from a participant and using Benartzi’s PensionPlus strategy, an advisor can tell the participant what his or her retirement paycheck should be based on their 401(k) account balance and their ability to delay claiming Social Security.
“It’s about helping people create a personalized plan,” Benartzi said. “It’s helping you realize what the possibilities are for you.”
Fraser explained that at age 65, a participant might start getting a retirement check of $2,600 a month from their 401(k). But if they agree to wait until age 70 to begin claiming Social Security (because the longevity quiz predicted a long lifespan in retirement), that check can be increased from $2,600 to $3,000 right now.
“There’s a reason that we do this stuff, and it goes beyond pure finance and numbers. It’s about changing lives.”
George Fraser
“You’ll start getting that at age 65. But what’s going to happen is that we’re going to start to draw down your 401(k) to get you there. Which people don’t get,” Fraser said, adding that many people still mistakenly want to claim Social Security as soon as possible. “The media has talked about the fact that it may not be there for you. So we’ve scared them into taking it early.”
He told the story of “Gus,” a participant in Oregon with a heart condition who has worked at a wood manufacturing company for 47 years, never making more than $35,000 a year. But he still has a nice 401(k) balance thanks to his work over the past 20 years with Fraser. Based on Benartzi’s PensionPlus, Fraser was able to show Gus that he could retire right then if he wanted to, instead of waiting another 2 years.
“There’s a reason that we do this stuff, and it goes beyond pure finance and numbers. It’s about changing lives,” Fraser said.
Why Academics Need Advisors
The model of an advisor in the field (like Fraser) working with an academic (like Benartzi) to advance research is critical to the process, Benartzi said, because that partnership can speed up the implementation of game-changing innovations.
“People might not remember—it took one advisor to get ‘Save More Tomorrow’ to the field back in 1998,” Benartzi said. The advisor, Brian Tarbox, passed away and didn’t get to see the program’s huge success, “but without that advisor it would have taken us a few more years to get the auto-escalator to the field and it would have taken us longer to get it into [the Pension Protection Act of 2006],” Benartzi said.
“Every advisor who reads the magazine could be the next one with the big idea to transform the industry.”
Shlomo Benartzi
Save More Tomorrow, designed by Benartzi and Thaler, is now offered by more than half of the large retirement plans in the U.S.
“If there’s one big message I want to leave the readers with, it is that every advisor who reads the magazine could be the next one with the big idea to transform the industry.”
“Advisors often don’t realize the power they have if they are implementing new ideas in the field, and I think George with the pennies and our joint work also on decumulation—if he didn’t help me test the decumulation tools in the field it would have taken me a bit longer. Eventually I would have found a way to do it, but we need speed. People need help,” Benartzi said.
By the way, coming soon is Fraser’s next great idea—one he says “will change the way the average American thinks about and prepares for income and lifestyle in retirement.”
Fraser has several stories about real life scenarios he likes to share. For example, say a 401(k) participant is a 20-year-old who will never make more than $25,000 a year.
“Most people would agree that person can’t save $100,” he said. But here’s how the “Pennies on the Dollar®” approach could work for them:
“If you start by saving one penny of every dollar at age 20, increase it by a penny per year to six pennies of every dollar by age 26, and maintain that six-penny rate from age 26-65, that person will have saved $63,875 by age 65. If that were to grow at 6% on an annual basis, that person would have $296,413 by age 65. So does that make sense to providers who are looking for average account balances that are bigger?”
In retirement, that person could withdraw the equivalent to 80% of their monthly salary, or roughly $1,667. Combine that with a Social Security benefit of as little as $1,400, and that person who never made more than $25,000 per year is drawing over $3,000 per month or $36,000 per year.
SEE ALSO:
• Shlomo Benartzi’s PensionPlus to be Offered by OneAmerica
EDITOR’S NOTE: This article first appeared as the cover story of recently released 401(k) Specialist Magazine Issue #1 2023. Click here to read it as it appears in the digital edition of the magazine.