Alicia Munnell firmly believes there’s a retirement crisis (see “Exclusive Interview with Alicia Munnell: Auto-Enrollment Without Auto-Escalation Reduces Deferral Rates,”FiduciaryNews.com, February 17, 2016).
She understands employees aren’t saving enough.
She’s also frank enough to admit that one of the causes is the behavioral finance researcher’s favorite nudge – auto-enrollment.
Auto-enrollment has been a boon to all those seeking to increase employee participation in their company’s 401(k) plans. And this is true. Plans that offer auto-escalation have witnessed a marked increase in the percentage of employees saving for retirement.
You’d think that’s a good thing.
Alicia Munnell knows it’s not. It’s not just a gut instinct sort of think, either. She’s studied the numbers.
The fact is, we’ve made 401k plans such a no-brainer that employees aren’t even thinking about them anymore. No. Like so many lemmings, they’re merely following the default decisions of the plan sponsor (actually, the professionals that advise the plan sponsor).
To say they “set it and forget it” gives them too much credit. Employees merely forget it. The plan sponsor sets it.
Therein in lies the problem, according to Munnell. Employees are told the plan works on auto-pilot and they don’t have to do anything. It’s easy. No effort. Just forget it.
Oh, it’s not like they’re forced to save. They can always opt out. But that requires effort. And behavioral researchers insist that “effort” is the problem. And those academics are correct. Employees don’t want to exert the effort. That’s why they didn’t save when saving required effort. That’s also why they don’t stop saving when stopping requires effort.
Unfortunately, there’s a dark side to this Faustian Bargain. Sure, employees don’t want to exert the effort to stop the saving. But they also don’t want to spend the energy to increase their savings rate.
That’s a problem. Most auto-escalation policies put the tab at 3 percent of the employee’s salary. That’s barely enough to put a dent into what’s needed to meet the employee’s retirement goal.