RETIREMENT SAVING: TO NUDGE OR TO SHOVE?
December 15, 2008
There are two new proposals floating around that aim to greatly expand the number of American workers who save enough to retire by making the initial decision to save for them. The difference between the programs? It's the difference between a nudge and a shove, says Miller/McCune.
However to solve problems involving real humans, "nudging" people in the doing what is in their best long-term interest is the way to go. David John, a principal of the Retirement Security Project, wants to create just such a nudge in regard to retirement savings, using what his group calls the automatic Individual Retirement Account (IRA):
- The premise underlying automatic IRAs is the same one that has launched a thousand charitable giving campaigns: get employees to commit, upfront, to parting with a certain dollar amount every pay period, and the contributions will roll in steadily.
- Most employers that don't currently offer a retirement plan would be required to offer their workers, through automatic enrollment, the ability to deposit on a tax-advantaged basis at least 3 percent of annual pay into IRAs via payroll deduction, up to the legal maximum.
- But workers can opt out or decrease the percentage.
Moreover, the provisions for automatic 401(k)s -- that is, retirement saving plans in which employees are automatically enrolled, requiring them to opt out if they choose not to save -- represent a dramatic shift in plan design, says John:
- Traditional 401(k) plans require that workers make an explicit choice to participate; under that system, the power of inertia too often works against employees, who fail to enroll because they never get around to completing the paperwork or feel too overwhelmed by the various investment choices.
- For companies that have implemented automatic enrollment, 401(k) plan participation typically has risen from 75 percent of employees to 90 percent or more.
- For workers for whom saving is especially critical, such as low earners, a study showed plan participation zooming from 13 percent to 80 percent.
Source: Amy R. Ramos, "Retirement Saving: To Nudge or to Shove?" Miller-McCune, November/December 2008; based upon: "The Automatic 401(k): Enhancing Retirement Security for America's Workers," Retirement Security Project, 2008.
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