Recently the Nobel Prize for Economics was awarded to Richard Thaler. He was probably one of the few winners to create an immediate difference for millions of folks' retirement.
Back in the 1980's when the first 401k's were established, they were never intended to replace pension plans. One BIG difference, which proved detrimental: the 401k was voluntary. In order to activate the account:
1. the employees had to enroll in the plan,
2. they had to contribute some of their own money to receive the employer match, which was often considered "free money",
(Some companies contributed a minimum amount with no employee contribution.)
3. AND they had to choose the investments within the account.
This proved too big a task for most folks. They found the requirements confusing or intimidating even when help was offered. So instead of being a beneficial tool towards retirement savings, the 401k faltered.
Richard Thaler and others working in behavioral economics found, through their studies, that employees needed more than help; they needed the task to be done for them! For years he advocated that companies "nudge" employees to enroll. That "nudge" evolved into auto-enrollment changing the process for most firms: all new employees would be automatically enrolled as part of the companies' employee orientation and benefits.
The next step he championed was "auto-escalation". The employee starts small, contributing 2%-4% of his/her salary to the plan and agrees to increase that percentage each year until they reach the maximum allowable amount. In good years, when the employee receives a bonus or sizable raise, he/she may jump the increase 2% or 3% extra to reach the maximum amount sooner.
An employee always has the option to "opt out" and close the account or discontinue contributing. Also, in a time of financial struggle, the employee may decrease or stop contributions for a period of time.
Many thanks to Richard Thaler and other behavioral economists for their contribution to helping Americans retire well.
Be $ Smart - call your HR office to learn about auto-escalation and other saving choices to help you reach your retirement goals.
