Salami Slicing & Frog Boiling

Salami slicing refers to a series of many small actions, often performed by clandestine means. As an accumulated whole, those small actions produce a much larger result than might have been possible if performed all at once. The advantage of strategic salami slicing is the ability to achieve large gains over time using small steps, incremental actions. Salami slicing is a movie favorite.¹

Boiling the frog is a fable. The premise is that if a frog is put suddenly into boiling water, it will jump out, but if the frog is put in tepid water which is then slowly brought to a boil, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor cautioning people to be aware of even gradual change lest they suffer an eventual, undesired consequence. It is also used in business circles to reinforce the widely-held belief that change needs to be gradual to be readily accepted.

DELI-cious Deferrals?

We are talking variants of automatic escalation here: First, “Save More Tomorrow²,” comprised of:

• A voluntary commitment today to save more in the future (avoid present bias), 
• Timing the savings rate increases to coincide with pay increases (minimize loss aversion, increased savings is a reduction in the increase in take home pay), and 
• Elections that remain in force until revoked (to take advantage of mental weaknesses, inertia). 

Second, automatic escalation. More simply, incorporating a provision in the plan that increases the savings rate by 1% or 2% of pay each year on a specific date.

Third, increasing savings by 1% of pay whenever take-home pay increases by more than 1% of pay, regardless of the reason (after stopping a deduction, reducing tax withholding, reaching FICA limit, etc.).

All versions will be most effective if timed to occur with a pay change – so ultimately savings and take-home both increase.

Timing is Everything Here!

First Pay Period of a Year
For most employees, in most years, the first paycheck each year is less than the last paycheck of the prior year. There are many reasons that vary significantly – restarting FICA taxes, higher health premiums, changes in coverage, etc. Because workers are used to seeing changes at that time, it may become a timing candidate.

Mid-April
For each of the past seven years, there will be more than 108 million federal income tax refunds averaging $2,700 or more.³ Do you think you might time the increase where many, perhaps most, participants just received their federal income tax refund? Do you think you might approach participants with a recommendation that they prospectively change both their federal income tax withholding and increase their contribution rate commensurately?

Common Effective Date
Finally, a tactic some employers use is a Common Effective Date for salary increases. While every worker doesn’t get a salary increase every year, comparable to Jan. 1, it becomes a date when individuals focus their attention on their paychecks and financial decisions.

It is Not Too Aggressive: It Will Improve Engagement

Even if you have decided against automatic enrollment, why not adopt one of the versions of automatic increases noted above? What’s wrong with showing interest in your worker’s financial well-being through an annual “check-up” on preparing for retirement?

Should workers complain about perennial application of escalation features, plaintively asking “How many times do I have to tell you that I don’t want to participate in this plan or don’t want to increase my contributions?” The simple response is “Just once a year” or “Just checking in once a year.”

You may find implementing “salami slicing” or “frog boiling” provisions to be a thankless task. Your reward: improved worker engagement when retirement savings and household wealth both increase.

¹Penny-shaving and similar “salami slicing” initiatives, escapades occur in movies like Superman III, 6/17/83, Office Space 2/19/99, Entrapment 4/30/99, Hackers, 9/15/95. See also: T. Whiteside, Computer Capers, Crowell Publishing, 1978. The term “salami slicing” alludes to trimming off just a bit of a salami, so small that it will go unnoticed, then selling the entire salami as if it were whole. Another variant is “coin clipping” where individuals would slice off just a sliver of a gold or silver coin. It is why dimes now have ridges on the edge, and why only full coins are legal tender.
²R. Thaler, S. Benartzi, Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving, August 2001, Accessed 6/10/19 at: http://independent401kadvisors.com/library_articles/savemoretomorrow.pdf
³Internal Revenue Service, Accessed 6/11/19 at: https://www.irs.gov/newsroom/filing-season-statistics-by-year As of: May 10, 2019, of the 141+MM 2018 federal income tax returns processed to date, 101+MM (72%) generated a refund that averaged $2,729, where 86+MM of those refunds were direct deposited.; November 23, 2018, of the $154+ MM 2017 federal income tax returns processed, 111.9+MM generated a refund that averaged $2,899, where 90.1MM of those refunds were direct deposited; September 1, 2017, there were 145.3MM 2016 tax returns, 108.7MM processed generating a tax refund that averaged $2,782, where 88.1MM refunds were directly deposited; December 30, 2016, there were 152.5MM 2015 tax returns, 111.1MM refunds, averaging $2,860; December 25, 2015, there were 151.0MM 2014 tax returns, 109.4MM refunds, averaging $2,797; December 26, 2014, there were 149.7MM 2013 returns, 109.5MM refunds, averaging $2,918; December 27, 2013, there were 148.2MM 2012 returns, 109.6MM refunds, averaging $2,929.