Thinking Small Could Deliver Bigger Retirement Success for Gig Workers

Daily, weekly and monthly contribution schemes gauge behavior

Workplace retirement plans are jammed full of features to coax employees into better saving habits. None is more elemental than the move by many retirement plans to automatically enroll new employees in a plan, rather than wait for the employee to maybe join. Deducting contributions automatically from workers’ paychecks provides another valuable guardrail that keeps workers committed to saving. There’s also often the powerful deal sweetener of a matching employer contribution.

Gig workers have no such retirement planning support system. If you’ve opted for the self-employed freelancer life — or have been pushed into it — it’s totally on your back, conscience and bank account to figure it all out. That’s no easy challenge for the growing “contingent” workforce. The types of tax documents filed with the Internal Revenue Service highlight the increasing presence of independent contractors. Research from the Mercatus Center at George Mason University found that between 2000 and 2014, the number of W-2 filings, the official tax doc that reports income for traditional full-time employees, fell 3.5 percent. Filings of the 1099-MISC, the official tax doc that reports income paid to independent contractors, grew 22 percent. A 2015 federal study estimates that gig workers account for more than one-third of the workforce.

The growing prevalence of independent contractors creates a new wrinkle to the retirement savings crisis. The struggle many full-time employees experience to save enough — even when they are spoon-fed a retirement plan at work — doesn’t rival the challenge facing gig workers who must create, maintain, fund and run their own retirement plans. It’s a concern that is beginning to get more attention from policy makers. “Exploring the ‘Gig Economy’ and the Future of Retirement Savings” was the focus of a February 2018 U.S. Senate hearing.

Recent research from UCLA Anderson’s Hal Hershfield and Shlomo Benartzi, and Steven Shu of City University of London and Digitai, suggests that an effective way to help gig workers save for retirement may be to think small.

The researchers surmised that one speed bump keeping gig workers from saving for retirement could be related to the “wealth illusion” that causes retirees to believe the value of a large lump sum is more than the monthly income stream it can generate. Hershfield, Benartzi and Shu set out to explore whether this psychological tendency to hold lump sums dear was an impediment to saving for retirement.

In a 2017 field study of nearly 9,000 consumers who had recently signed up for Acorns, a financial savings app (co-author Benartzi is a board member of Acorns), each person was offered one of three nudges. Participants were asked if they wanted to sign up for a savings plan that would deduct:

• $5 per day
• $35 per week
• $150 per month

Although there is no dollar difference in what will be saved each month, the smallest sum was far more popular than the more lump-sumish monthly deposit. About 30 percent of participants who were given the daily prompt signed up, compared to 10 percent for the weekly frame and 7.1 percent for the monthly frame. That range held when the team controlled for income and age.

Taking the small ball approach could be especially effective at encouraging lower-income workers to save. Higher-income participants offered the $150 a month plan signed up at a rate three times that of lower-income participants presented with the $150 monthly frame. At the $5 a day level there was no difference in uptake among different income groups.

“The results of this work suggest that one way to reduce the income gap in saving behavior is by framing recurring savings programs in more granular ways: not only did this framing encourage more people to save, it may have encouraged those who tend to struggle the most to start saving,” the researchers explained in a working paper.

“Start” was an important qualifier.

Alas, while the daily small approach was most effective in getting folks to commit to recurring saving, it also had the highest attrition rate. After one month 75 percent of the day savers were still enrolled, compared to around 85 percent of the weekly and monthly savers. Yet, given their higher initial buy-in, the $5-a-day group still had the highest participation rate after three months.

The fact that small daily sums prompted an initial participation rate four times the level of the monthly option is an interesting insight into what might help move the needle to get more gig workers to save. But the fact that just one in five participants who were offered the small daily saving nudge remained enrolled in the plan three months later suggests many more nudges are needed to help gig economy workers tackle the hard job of saving for retirement.