Free Toasters to Free 1% Match

Four decades ago, savings and loans and banks lured customers to deposit their money by giving toasters away. Today, we are hearing a free 1% “match” for encouraging people to save for retirement in setting up new IRA accounts. I suggest that the toaster was not free, and the 1% is not a gift. Successful marketing is to realize the intended behavior of the targeted audience. Giving 1% “match” for a worker to deposit money at a brokerage is the latest gimmick to open accounts. The 2023 IRA contribution annual limit for anyone under age 55 is $6,500. This means a maximum $65 dollar “match” contribution. I know it is not a lot of money, but why should the brokerage company give away $65 and when the trading cost is now $0? (I know, trading is not really $0, but it is $0 commission or transaction cost to the customer.) So what is the motivation of getting workers to open an account and give away 1% while making no money on transactions? It surely cannot be simply trying to help workers to save for retirement; after all, a brokerage company is a for-profit enterprise. At best, we can consider this as an “encapsulated interest”. This means that it is possibly good for both the brokerage and the saver. The idea is to get workers to open an account allowing the brokerage firm to have access to the account holder plus his/her data and cross sell services over time. In this case, a $65 “match” is a cheap way to gain access to a customer for at least 5 years.

The question is: will 1% (or a maximum of $65) be a sufficient motivator to change the inertia of non-savers? The past 40-years have shown that most American do not save and certainly do not save enough for retirement through an employer sponsored plan. After 2006’s QDIA legislation and related regulations, employers began to leverage the understanding of behavioral finance and instituted auto-enrollment and auto-escalation. This has proven to be immensely successful in moving workers to save for retirement. Obviously, without forced savings, employer match (typically 50% up to the first 6%) was insufficient to get workers to save voluntarily. So, if a 3% match has been a non-motivator to entice savings at work (with little administrative efforts), will this “free” 1% be sufficient to motivate a worker to set up an IRA account and move the money to gain 1% match up to a maximum of $65? What is the possible real long-term cost of this free 1% “match”?

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