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How Do Companies Boost 401(k) Enrollment? Make It Automatic

Apr 21, 2014
Originally published on April 21, 2014 2:15 pm

More Americans are saving for retirement through their employers' 401(k) programs. That's because in recent years they've been given a strong nudge — more companies are automatically enrolling workers in retirement savings programs.

Some firms are also automatically increasing the amount employees contribute. That's just as important, experts say.

And all of this makes a big difference: Without it, millions of Americans don't save at all.

Making Time For Retirement Planning

A recent survey by TIAA-CREF found that, compared to setting up a retirement account, Americans spend more time choosing a flat-panel TV or what restaurant to have a birthday party at.

"Yeah, it's kind of embarrassing to admit that I spend a lot more time doing other things," says Mary Hakken-Phillips, a 33-year-old executive assistant in Chicago.

She says she spends countless hours planning vacations, for example. But retirement planning — not so much.

Like many Americans, Hakken-Phillips knows she should be saving for retirement. She even works at a financial services company. "I was hired in June of 2010, and they gave me a very sophisticated folder of retirement investment options," she says. But it was so complex and thick, she says, "I kind of glazed over when they handed it to me."

And still, four years later, she's not saving anything.

Monkeying With Economics

We like to think of ourselves as rational creatures. But research shows that when it comes to financial decisions, people can behave a lot like, well, monkeys.

Laurie Santos is a professor at Yale University. She's done research experiments where she gave monkeys money (actually fake money or tokens) and asked them to make financial decisions. Some of the choices were simple: Do you want to buy one grape or two grapes with your token?

But amazingly, with much more complex decisions, Santos says, the monkey responses match the most common human responses exactly.

What about saving some of those tokens to buy food with later on? "One thing we never saw in the monkey marketplace was any evidence of saving — just like our own species," Santos says.

There are all kinds of complicated psychological and behavioral explanations, with terms like "loss aversion" and "hyperbolic discounting."

But researchers have figured out that if a company signs up its workers for a retirement account automatically — instead of relying on them to fill out the paperwork and make decisions — it boosts participation dramatically. People can opt out of saving, but they usually stick with it.

Rob Austin is the retirement research director at Aon Hewitt, a consulting firm that works with hundreds of big companies on their employee retirement programs. He says auto-enrollment programs "drastically" increase employee participation.

New data for 2013 show that average participation rates for employees at companies with auto-enrollment was around 85 percent, Austin says.

And more companies are adopting the approach. Austin says after the government gave the green light a few years ago, three times as many of the large companies he tracks started offering automatic enrollment. About 60 percent now do it. But in the past couple of years, that momentum has stalled.

"It's a trajectory that is good but one that we would like to see continue to increase," Austin says.

Automatic Increases To Boost Saving

Austin would like to see more firms automatically increasing the amount that employees save. Many firms start workers off automatically saving just 3 percent of their income. Ironically, that's less than what people choose at other companies when they do get around to signing up on their own.

So, Austin says, "keeping people in at 3 percent and leaving them at 3 percent is not going to generate enough retirement income for individuals."

A lot of companies still aren't doing any of this. Half of all American workers still don't have access to any 401(k)-type retirement plan — let alone auto-enrollment.

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STEVE INSKEEP, HOST:

OK, you heard talk there at a Transpacific Trade deal. And as American officials ponder the nation's economic future, many Americans are saving for their own futures. Some may hardly realize they're doing it. Increasing numbers of people are saving for retirement through their employers' 401(k) programs. In recent years, they've been given a strong nudge by their employers to do that. But progress may have more to do with psychology than finance.

NPR's Chris Arnold explains.

CHRIS ARNOLD, BYLINE: The big change is that more employers are automatically enrolling employees in retirement savings programs, and more are automatically increasing the amount that employees contribute. And all of that is a big deal because without it, a lot of people don't save anything. A recent survey by TIAA CREF found that compared to setting up a retirement account, Americans spend more time choosing a flat panel TV or what restaurant to have a birthday party at.

MARY HAKKEN-PHILLIPS: Yeah, it's kind of embarrassing to admit that I spend a lot more time doing other things.

ARNOLD: Mary Hakken-Phillips is a 33-year-old executive assistant in Chicago. She spends a lot of time planning vacations. Like many Americans, she knows that she should be saving for retirement. But even though works at a financial services company...

HAKKEN-PHILLIPS: I was hired in June of 2010 and they gave me a very sophisticated folder of retirement investment options. And It was so complex and thick that I - basically glazed over when they handed it to me.

ARNOLD: And still, four years later, she's not saving anything. Now, we like to think of ourselves as rational creatures. But actually, research shows that when it comes to making financial decisions, people can behave a lot like, well, monkeys.

LAURIE SANTOS: As the monkeys entered the door of the market a human would give them a big wallet full of tokens so they could actually trade the tokens with one these two guys here.

ARNOLD: That's Laurie Santos. She's a researcher giving a TED Talk about experiments where she gave monkeys money or tokens and asked them to make financial decisions. Some were simple, like here a monkey named Honey has one token and a choice of which plate of food to buy.

SANTOS: Here's their choice, 1 grape or 2 grapes. You can see Honey, very good monkey economist, goes with the guy who gives more.

ARNOLD: But the kind of amazing things is that even with much more complex decisions, Santos says the monkey responses match the most common human responses exactly. And when it comes to saving some of those tokens to buy food with later on. As you might imagine...

SANTOS: One thing we never saw in the monkey marketplace was any evidence of saving, you know, just like our own species.

ARNOLD: There are all kinds of complicated psychological and behavioral explanations, with terms like loss aversion and hyperbolic discounting. But the bottom line is that researchers have figured something out. If a company signs up its workers for a retirement account automatically, instead of relying on them to fill out the paperwork and make decisions, the stuff that derailed Mary Hakken-Phillips, if all that's done automatically for people, that makes a huge difference.

People can opt out and decide not to save, but they don't opt out.

ROB AUSTIN: We find that it drastically increases participation rates in the plan.

ARNOLD: Rob Austin is director of retirement research at Aon Hewitt. It's a consulting firm and it works with hundreds of big companies on their retirement programs for their employees.

AUSTIN: Our latest data, and this is based off where people were at year-end 2013, average participation for plans subject to automatic enrollment was at 84.6 percent.

ARNOLD: So this approach gets the vast majority of employees to save for retirement. And more companies are doing it. Austin says, a few years ago, after the government gave the green light, there was a big change. Of large companies he tracks, three times as many started offering automatic enrollment, 60 percent now do it. But in just the past couple of years, that momentum has stalled.

AUSTIN: It's a trajectory that is good, but one that we would like to see continue to increase.

ARNOLD: Also Austin would like to see more firms automatically increasing the amount that employees save. Many firms start workers off automatically saving just 3 percent of their income. Ironically, that's less than what people choose to save at other companies when they finally do get around to signing up on their own. So...

AUSTIN: Keeping people in at 3 percent and leaving them at 3 percent is not going to generate enough retirement income for individuals.

ARNOLD: And a lot of companies still aren't doing any of this. Half of all American workers still don't have access to any kind of employer sponsored 401(k)-type retirement plan, let alone auto-enrollment. Chris Arnold, NPR News.

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INSKEEP: It's MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.