Shlomo Benartzi wants to make it auto-pilot easy to open a retirement savings account, but then let people decide on their own when and how much to save.
In a new op-ed for The Wall Street Journal published Feb. 3, the behavioral economist known for his research on retirement savings says his idea of an auto-pilot for 401(k) plans that makes it easy to save, but avoids concerns about excessive paternalism from employers—would work for three reasons: because it’s a mental reminder that 1) you should save; 2) you haven’t started saving yet; and 3) the paperwork has been done for you.
In the op-ed, Benartzi begins by stating that automated retirement-savings accounts—where companies enroll employees and have them start saving at a default rate unless they opt out—have been a huge success. But they aren’t a cure-all for getting more Americans to save for retirement.
He notes that a lot of organizations don’t use automated savings for legal or philosophical reasons. “To fix that, we need a nudge that makes it easy to save without being perceived as too paternalistic, and that is permitted under all state laws,” Benartzi writes.
His proposal involves automating the process of setting up a savings account, but not the actual savings part.
3 reasons why it will work
Benartzi’s op-ed says there are three important behavioral reasons why automating the account-setup process could make a difference, even if the actual savings part is left up to the employee.
“First, it makes saving easier. Instead of two hard decisions (should I set up an account and how much should I save?) workers have to make just one—how much should I set aside?”
He notes people can of course choose zero or take no action, which means they will have an account but won’t be saving anything.
Second, Benartzi says when people have to choose a savings rate on their own, they often end up saving more than they would have had their plan had a default rate. That’s because if the default savings rate is 3% as it often is, many people will think that’s the right amount, even though it’s usually way too low.
Third, he notes that once employees are auto-enrolled in a retirement account, there are opportunities to nudge them to start saving, even if they choose not to at first. “As it is now, those workers who opt out of auto-savings plans are essentially written off and never sent reminders that they haven’t begun saving yet.”
By sending non-savers reminders they have a zero balance in their account along with an option allowing them to start saving with a single click, it will likely entice more workers to start saving.
He backs up all three points with research in the WSJ op-ed.
How plan advisors can help
“Why not consider setting 529 auto-accounts for all participants who have new children? Such accounts will not only remind participants to save but can also build a deeper relationship between the advisor, participant and the next generation.”
Shlomo Benartzi
401(k) Specialist reached out to Benartzi, professor emeritus at UCLA Anderson School of Management and the founder of PensionPlus, to inquire about how retirement plan advisors can get involved and do some nudging of their own. He provided a trio of ideas.
• Find the right plan sponsor. “If they’re already use auto-enroll, then you’re set. If they’re hesitant about auto-enrollment, then perhaps auto-accounts is the right fit.”
• Find the right recordkeeper. “You’ll obviously need an open minded recordkeeper, but it turns out that some actually create the accounts anyway—they just forget to tell the participant about it. In such cases, there won’t be any incremental cost to auto-accounts.”
• Think holistically, and don’t stop with retirement account. “Why not consider setting 529 auto-accounts for all participants who have new children? Such accounts will not only remind participants to save but can also build a deeper relationship between the advisor, participant and the next generation.”
A nudge everyone can agree on
“My hope is that auto-accounts are a behavioral intervention that everyone can agree on,” Benartzi writes in the op-ed, adding that the nudge makes it easy to set up an account, but ensures that people start saving only if they choose to do so.
He reminds people that in physics, inertia is defined as the tendency of objects in motion to stay in motion, and objects at rest to stay at rest. It also applies to human nature.
“The most difficult step is usually the first one. The paperwork is tedious and confusing; we’re worried about trying something new; we don’t know how to start,” Benartzi writes. “This is true even when we want to take that step.”
Auto-accounts turn inertia into a force for change, he concludes, while still ensuring workers choose when and how much to save. “The nudge does the paperwork for us, so all we have to do is decide if we want to keep going.”
Read Benartzi’s WSJ op-ed here (subscription required)
SEE ALSO: