Peer Pressure Doesn’t Help People Save More for Retirement

In April 2008, the Sacramento Municipal Utility District gave grades to 35,000 customers based on the amount of energy they consumed relative to 100 neighbors with a similarly sized home. Those that were efficient received smiley faces, while the more wasteful residents got frowns—at least at first. The program helped reduce energy use among report card recipients by 2% in six months.

The results of the experiment were embraced as proof that people can be induced by the behavior of their peers into changing their behavior in ways that are beneficial to themselves and to society.

Unfortunately, this theory doesn't seem to hold when it comes to retirement savings.

For a recent study, Yale School of Management professor James Choi and four co-authors sent letters to some 1,400 workers of large corporations who hadn't enrolled in their company 401(k) plan, recommending that they contribute 6% of their respective salaries. But not all employees received the same letter: Some were told what percentage of workers in their age group were saving in their 401(k), while other were not.

What happened? Not what the researchers had hoped for.

When workers were informed about the savings habits of their peers, they weren't more likely to put money into their own accounts at all. What's more, non-savers who weren't subject to auto-enrollment in a 401(k) plan were actually less likely to save when presented with peer data.

Why? "It could be that learning that your peers are ahead of you financially is much more demoralizing than, say, learning that you use more energy than your neighbors," Choi wrote in the Wall Street Journal. "And when people are demoralized, they tend to disengage from a problem rather than address it."

This is a blow for anyone who cares about the plight of older Americans. Nearly one-third of workers don't have any savings at all, and those who do have something squirreled away don't have much—about $14,500, on average, among savers between 55 and 64.

Even employees who are saving in their 401(k)s are struggling. The median amount in these accounts is $18,433, according to the Employee Benefit Research Institute. Almost 40% have saved less than $10,000.

While saving in a tax-deferred plan is a great way to build up your nest egg over time, it turns out that getting folks to participate in these accounts—especially as wages stagnant—isn't as easy as showing them what other people are doing.

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