Feb. 27, 2018
Is your employer pushing you to save even more? Most likely yes — even if you’re not aware of it.
For years now, many employers have incorporated lessons from behavioral economics, the field of study blending concepts from economics and cognitive psychology.
Insights from behavioral economics show the profound effect our natural tendencies can have in shaping our decisions such as when we overvalue the present or become confused by too many options or let inertia guide our choices. Unfortunately, most of us can relate to these inclinations— which is no calamity when you’re going grocery shopping, but can have major ramifications when it comes to more pressing life and financial decisions.
Enter all the behavioral fixes that many employers have discovered “nudge” us toward better choices — like auto-enrollment, saving more in the future, auto-rebalancing and even target-date funds, which effectively take the thinking out of a more personal risk assessment and rebalancing.
This week, a new look at employers’ plans from Willis Towers Watson, a global advisory firm, shows even greater adoption of such efforts, according to results of a survey of 349 large and midsize U.S. companies that offer defined contribution retirement plans. Most notably, even more — 73% — of those employers surveyed last November, compared to 68% in 2014 and 52% in 2009 — automatically enroll new participants in retirement plans, according to Willis Towers Watson’s findings. In addition, 60% will increase employees’ contributions automatically (auto-escalation) in the future, also up from 54% in 2014, according to the survey.
Research shows providing too many choices can have the inverse intended effect sometimes causing confusion— and in keeping with those findings, 42% of the surveyed companies reduced the number of investment options over the past three years, in an attempt to counter decision paralysis or even the milder effects of “diversification” across many different funds rather than true asset allocation. Even more significantly, an additional 41% of employers intend to do so by 2020, according to the survey. Target-date funds are also becoming more ubiquitous: 93% of the responding companies use them as the qualified default alternative, up from 86% in 2014 and 64% in 2009.
In theory, all of this retirement plan tinkering should increase saving for retirement and take some of the friction out of financial planning that can often cost many of us years of saving and compounding if we intend to contribute to our retirement plans, or save more over time and rebalance but somehow don’t manage to do so. That was the thinking behind embracing concepts from behavioral economics as part of the solution to the enduring problem of inadequate retirement planning. But it’s worth noticing that these changes, while an improvement for many over the worse alternatives of not saving for retirement, or never rebalancing, or not increasing savings, or choosing a low-earning money market fund as a default investment, may not necessarily be the best choice for each individual.
All of this auto-piloting for the average employee shouldn’t come at the expense of taking the, well personal, out of personal finance. And its growing use may make it an even more important time for employees to pay attention and review plan specifics. Among the questions to ask include: what is happening automatically? Does that match your own specific goals? Are you investing in target-date mutual funds? If so, do you choose to be? How do your retirement plan offerings align in with any outside investments? And perhaps most important are your emergency savings in taxable accounts sufficient? Saving for retirement is important and necessary, but so is having an adequate cushion to weather unexpected costs that could arise from job loss, health, car, or housing expenses or even family emergencies.
Employers, for all of the good intentions to auto-enroll us so we don’t miss out on investing for our future, unfortunately, can only auto-enroll us in retirement funds, not for planning for everything else.