NCPA - National Center for Policy Analysis

Making Saving Easier

September 5, 2003

New research from the field of behavioral finance, which draws on psychology and economics, provides data on the disconnect between the desire to prepare for retirement and the failure to do so. Researchers have found that for many investors, the task of sifting through pamphlets about their company's 401(k) plans ranges from unpleasant to horrible.

Some people end up doing nothing when confronted with the need to pick savings goals, select appropriate asset allocations, screen investment choices and rebalance their portfolios regularly.

According to Brigitte Madrian, an associate professor in the business and public policy department at the Wharton School of the University of Pennsylvania:

  • When employees must open their own 401(k) plans, the participation rate for workers with less than 12 months of tenure is 50 percent.
  • When employees are enrolled automatically but may opt out, participation is 90 percent.

Research also shows that giving employees too many choices can confuse them.

Sheena S. Iyengar, an associate professor of leadership and ethics at the Columbia Business School, has found that 401(k) participation peaks at 75 percent when a retirement plan offers two investment options.

Her results, based on data from 647 company retirement plans run by the Vanguard Group, also show that participation drops to 60 percent when investors have 60 choices. With each additional 10 choices, participation falls by 2 percent.

Source: Elizabeth Harris, "In These 401(k)'s, Workers Do Less to Save More," New York Times, August 31, 2003.


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