The Effect of Lifetime Income Disclosures on Retirement Savings

August 2013

Given the widespread transition from defined benefit (DB) to defined contribution (DC) retirement plans, Americans increasingly face the challenge of assessing whether their saving behavior is likely to provide a secure retirement. Appropriate saving choices in one’s working years requires understanding how current saving choices translate into income in retirement, which requires a high level of financial sophistication. Using a large-scale field experiment involving university employees, we measure how an intervention designed to inform individuals about the relationship between current contributions and retirement income affects their saving behavior. We find that individuals sent an informational mailing regarding how contributions translate into retirement income along with general retirement planning and enrollment information increased their annual contributions by approximately $85 per year, on average, relative to individuals who were not sent a mailing. Our results suggest that projections of how current contributions generate retirement income can influence the level of contributions into tax-deferred saving plans, and that people do not fully understand how saving today translates into income in retirement. The fact that people who were sent information about this translation increased their rate of saving suggests that, on average, people tend to overestimate the level of retirement income that current saving generates and, therefore, may save less than intended. This finding is of interest to policymakers as it suggests that a similarly-designed, widespread policy initiative may modestly increase retirement savings.