NCPA - National Center for Policy Analysis


May 16, 2007

Criticisms of America's low national savings rate often hinge on the assumption that this low savings is driven by Americans' proclivity for excessive spending.  But according to researchers with the National Bureau of Economic Research (NBER), the complexity of establishing a savings plan can also play a role in deterring saving.

The researchers looked at two companies that greatly simplified the process of enrolling in a workplace retirement savings plan.  They found:

  • Changes dramatically boosted employee participation.
  • Making it simpler for already-enrolled employees to raise their plan contribution rates is another mechanism for increasing savings in the plan.

"Many financial decisions that individuals face are complicated and daunting for those who are not financial experts," they write.  "One important consequence of this complexity is that individuals procrastinate in making these decisions."

The two companies in the study -- referred to as Company A and Company B -- adopted a program called Quick Enrollment.

  • Employees who checked a box on a Quick Enrollment card and returned it to the employer were enrolled in the retirement savings plan at a single contribution rate and asset allocation pre-selected by the employer.
  • Company A also implemented a Web-based Quick Enrollment; employees remained able to enroll at any of the many contribution rates and asset allocations allowed in the plan by using the previously available phone or Internet channels.

The results are powerful evidence for the ability of simplicity to accelerate savings:

  • The program tripled participation rates among new hires at Company A.
  • Among existing employees at Company A, 25 percent of previous non-participants opted to join the 401(k) retirement plan after being offered Quick Enrollment during a four-month period.
  • At Company B, offering Quick Enrollment to existing employees once a year for three years caused 45 percent of non-participants to sign up.

Source: Matthew Davis, "Simplification Raises Saving Rates," NBER Digest, May 2007; based upon John Beshears et al., "Simplification and Saving," National Bureau of Economic Research, Working Paper No. 12659, October 2006.

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