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June 03, 2015 at 12:46 PM
Is saving enough money to live off in retirement as important as preserving your health?
If so, why then do employees re-enroll in their health plan annually, but set and forget their 401(k) plan choices when they first join a company?
That point, made by Morningstar’s head of retirement research, David Blanchett, is but one of many behavioral research insights that he and Steve Wendell of financial guidance site HelloWallet (a Morningstar subsidiary) make in a wide-ranging interview in the June/July issue of the investment research firm’s magazine.
A common theme emerging from the interview with the Chicago-based firm’s director of policy research, Scott Cooley, is that temporal myopia — a bias to the present — and procrastination stack the deck against adequate retirement savings, barring plan-design workarounds to these normal human frailties.
As Wendell puts it, “expenses always rise to meet income, regardless of what the income is.”
So the question is: How can policy overcome this tendency?
A very blunt approach Cooley asks about involves forced savings to the degree employed in places like Australia or Chile.
While we have a lesser degree of forced savings through Social Security, Blanchett says U.S. politics make it unlikely we achieve the greater extent of forced retirement savings in other countries.
But “we can get most of the way there by defaulting individuals,” adds Wendel, referring to America’s largely employment-based system, and the increasingly common auto-enrollment that companies with 401(k) plans employ.
The HelloWallet chief scientist warns, however, that auto-enrollment excludes the half of all Americans who work for companies that lack a retirement plan, and adds the proviso that 401(k) default options are blunt instruments “not tailored to the individual.”
That’s why Blanchett emphasizes the idea of treating retirement enrollment like health insurance enrollment, which is annual.
Mandated re-enrollment opportunities could trigger employees who opted out the previous year to do so in the current year; his interlocutor Wendel also advocates — besides auto-enrollment — auto-increases, saying the standard 3% default rate is too low. (Wendel empasizes that the initial contribution rate has far greater impact than auto-escalation in terms of achieving meaningful retirement savings.)
Apart from methods to induce savings, a key overlooked challenge involves keeping workers from redeeming shares when they change jobs. Says Blanchett:
