From Free Toasters to a Free 1% Match
Will a 1% Match Motivate Non-Savers?
The popular retail brokerage, Robinhood, will offer a 1% “match” to customers who contribute money to an individual retirement account via the Robinhood Retirement program. Robinhood is bringing the concept of a 401(k)-style contribution match to its retail customers who may need access to a retirement plan through the workplace.
Four decades ago, savings, loans, and banks lured customers to deposit their money by giving toasters away. Today, we hear a free 1% “match” for encouraging people to save for retirement by setting up new IRA accounts. 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 a 1% “match” for a worker to deposit money at a brokerage is the latest gimmick to encourage people to open accounts.
The 2023 IRA contribution annual limit for anyone under age 55 is $6,500. This means a maximum $65 “match” contribution. I know it is not a lot of money, but why should the brokerage company give away $65 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 for 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 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 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 five 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 Americans do not save and certainly need to save more 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 immensely successful in moving workers to save for retirement.
Obviously, without forced savings, an 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 effort), will this “free” 1% be sufficient to motivate a worker to set up an IRA account and move the money to gain a 1% match? What is this free 1% “match’s” possible actual long-term cost?
Note: As an industry expert, Philip was asked for his thoughts on this subject for a CNBC Personal Finance article.