18 April 2024

How Do Companies Boost 401(k) Enrollment? Make It Automatic

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More Americans are saving for retirement through their employers' 401(k) programs. That's because in recent years they've been given a strong nudge — more companies are automatically enrolling workers in retirement savings programs.

Some firms are also automatically increasing the amount employees contribute. That's just as important, experts say.

And all this makes a big difference: Without it, millions of Americans don't save at all.

Making Time For Retirement Planning 

A recent survey by TIAA-CREF found that, compared to setting up a retirement account, Americans spend more time choosing a flat-panel TV, or what restaurant to have a birthday party at.

"Yeah, it's kind of embarrassing to admit that I spend a lot more time doing other things," says Mary Hakken-Phillips, a 33-year-old executive assistant in Chicago.

She says says she spends countless hours planning vacations, for example. But retirement planning — not so much.

Like many Americans, Hakken-Phillips knows she should be saving for retirement. She even works at a financial services company. "I was hired in June of 2010 and they gave me a very sophisticated folder of retirement investment options," she says. But it was so complex and thick, she says, "I kind of glazed over when they handed it to me."   
And still, 4 years later, she's not saving anything.      

Monkeying With Economics 

We like to think of ourselves as rational creatures. But research shows that when it comes to financial decisions, people can behave a lot like, well, monkeys.

Laurie Santos is a professor at Yale University. She's done research experiments where she gave monkeys money [actually fake money or tokens] and asked them to make financial decisions. Some of the choices were simple: Do you want to buy 1 grape or 2 grapes with your token?

But amazingly, with much more complex decisions, Santos says, the monkey responses match the most common human responses exactly.

What about saving some of those tokens to buy food with later on? "One thing we never saw in the monkey marketplace was any evidence of saving — just like our own species," Santos says.

There are all kinds of complicated psychological and behavioral explanations, with terms like "loss aversion" and "hyperbolic discounting."

But researchers have figured out that if a company signs up its workers for a retirement account automatically — instead of relying on them to fill out the paperwork and make decisions — it boosts participation dramatically. People can opt out of saving, but they usually stick with it.

In fact, more companies have been adopting the approach since the government gave the green light a few years ago, although in the past couple of years that momentum has stalled.

Automatic Increases To Boost Saving 

Many firms start workers off automatically saving just 3 percent of their income. Ironically, that's less than what people choose at other companies when they do get around to signing up on their own.

Keeping people in at 3 percent and leaving them at 3 percent is not going to generate enough retirement income for individuals.

Furthermore, while auto-enrollment is generally a good idea, one downside is that when participants do opt out it can lead to administrative issues when plan sponsors are left with numerous small account balances.

For those who do “stay in” though, one good option to further automate savings is a target date fund, which automatically adjusts the investment mix of retirement savings accounts based on the retirement goals of the individual participants.

Then again, a lot of companies still aren't doing any of this. Rather, half of all American workers still don't have access to any 401(k)-type retirement plan — let alone auto-enrollment.

Click here for the original article from NPR.

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