Financial Incentives Beat Social Norms: A Field Experiment on Retirement Information Search (Working Paper)
Under-saving for retirement is a problem in the Netherlands, where every third person has a savings gap. Individuals can fill this gap with private savings. First and foremost, participants need to be aware of their potential savings gap, which is rarely the case. Dutch pension funds pay $397.54 million per year for communications with their participants, which is prescribed by the Dutch regulator; however, pension awareness in the Netherlands remains very low. This money is fruitless if participants do not read the communications. It is therefore important to understand how to effectively communicate with pension participants so that they are informed of their retirement savings and pension situation.
In an experiment with the participants of the Dutch pension fund for the retail sector (Bedrijfstakpensioenfonds voor de Detailhandel), 245,712 participants received one of six types of letters. In addition to the control letter, four letters used different social norms to motivate participants to log in to their personal website for personal retirement information. The sixth letter tested whether financial incentives were more effective than social norm motivators; this included a lottery where participants were entered for the chance to win 100 vouchers worth €25.
The authors find that letters using social norms are ineffective. In contrast, financial incentives increase the login rate by 70% compared to the control group. Participants motivated by financial incentives do not merely log in to cash in the incentive, but also stay to refer to information about their pension. A back-of-the-envelope calculation shows that the average cost per additional person logging into the website via the financial incentive is €0.33. Another important observation is that this effect of financial incentives and social norms is independent of participants’ characteristics. For example, financial incentives work just as well for female participants as male participants.
Pension communications are important in triggering people to stay informed about their future retirement income. Only if participants are aware of their savings gap will they be proactive to fill the gap with private savings. Pension funds must be able to reach participants with their pension communications to motivate them to take action. The study shows that a small financial incentive is a cost-effective measure to increase the login rate substantially.