If SECURE 2.0 was about making behavioral economics the default with its provision requiring auto enrollment in new retirement plans, SECURE 3.0 needs to be about making “smart” defaults the default.
That’s assuming there will be a SECURE 3.0, and that’s according to no less of an authority than famed behavioral economics professor Shlomo Benartzi, speaking at the NAPA 401(k) Summit in San Diego on Monday.
In his morning session titled, “SECURE 3.0 and Behavioral Economics: Making the Best Nudge Even Better,” Benartzi, Professor Emeritus UCLA Anderson, and Founder of PensionPlus, told the large main stage audience of retirement plan advisors, “There’s a lot more details that we’ve learned about that are not included in SECURE 2.0,” including more personalized automatic defaults—particularly given the explosion of participant data now available. “We’ve got to make our defaults smarter.”
Benartzi explained how SECURE 2.0 gave participants far more flexibility when it comes to saving—as in:
• Should they save for emergencies or retirement?
• Should they pay off student debt first?
• How much should they withdraw before RMDs begin at 75?
Unfortunately, this flexibility can also lead to paralysis, which is why Benartzi says holistic advice is needed to help people navigate the complexity of 21st Century finance. He also provided some examples of how people tend to make the wrong choices financially when left to fend for themselves—whether it’s picking the wrong (more expensive) type of health care plan or botching the choice about when to start claiming Social Security. He brought up the finding that the average household loses $182,000 by claiming Social Security too early. But when people use a tool that actually makes it easy to understand, they will delay claiming. He says users of PensionPlus are six times more likely to delay claiming.
Instituting “smart” defaults for accumulation and decumulation within retirement plans is how the needle can be moved in eliminating bad decisions and helping people save more.
Benartzi talked about default deferral rates, and how auto-enrolling participants at, for example, 7% instead of 3% wouldn’t cause them to opt out; it would only cause them to save more. Even auto-enrolling at 10% doesn’t cause them to opt out but instead spurs them to engage and adjust the rate to where they want it.
When it comes to auto escalation, the sooner the better. Benartzi says that while most people don’t necessarily want to make a change now, but in the “future,” make it the near future—as in 90 days instead of 365 days. His research has found this will not reduce participation.
He also advises that auto-escalators be increased faster, saying that 2% escalators instead of 1% does not increase opt-outs. The reason this is so crucial is because the median employee tenure is only about 4 years.
While there’s certainly no guarantee there will be any “SECURE 3.0” retirement reform package (and very likely not any time soon), Benartzi’s take on what should be tackled next in terms of smart defaults is good food for thought for plan advisors who can help implement features such as these with or without a legislative push.
SEE ALSO:
• Here’s How Much Waiting Until 70 Boosts Social Security Income
• George Fraser and Shlomo Benartzi: The Power of Pennies
• 2023 NAPA 401(k) Summit: Advising the Generations in the New Age of Uncertainty
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.