You may not know that Richard Thaler, winner of the 2017 Nobel Prize for economics, regards his greatest contribution to the field to be changes in how people save for retirement. He successfully advocated for automatic 401(k) plans, which many companies now have. But that may also be responsible for a drop in employee contributions.
Many employers now auto-enroll their employees in 401(k) plans rather than asking them to join. Thaler’s research shows that while people may know what is best for them, they need a “nudge” to overcome inertia. The “nudge” of auto-enrollment has successfully increased the percentage of workers with company retirement plans.
However, the employer typically sets a relatively low contribution rate. Still governed by inertia, most employees stick to it. Studies show that the average employee contribution has declined over the past decade. The answer may be another “nudge” — automatic annual increases in employee contributions.
Thaler’s take on auto-enrollment and auto-escalation is that you’ve got to have both to achieve retirement security.
Read the full article at Squared Away Blog.