It’s true for everyone: despite our best intentions, we often fail to accomplish what we set out to do. When it comes to retirement investing, millions of Americans do not meet their own declared saving goals for retirement.
As a result, almost one-third of the U.S. population has no retirement savings at all,while many others will fall well short of what they will need for their Golden Years.
A solution can be found in the field of behavioral economics, which suggests ways tohelp Americans start saving. It seems that saving is a lot like dieting — small changes can help you reach your goal.
For example, many studies have shown that being automatically placed in a savings plan dramatically boosts participation by employees — even if they can opt out.
These studies show that when an automatic savings plan is introduced with an opt-out, 60% to 70% of employees remain in the plan. This may seem like a technical nuance, but there is a big difference between opting in by completing an application versus choosing not to opt out.
A plan designed to take advantage of this behavior is called an automatic IRA. In the same way that many people fail to start saving, those placed in an automatic IRA simply fail to stop saving by withdrawing from the plan. Automatic IRAs help people build their savings using the power of inertia.
Here’s how: Workers in firms above a certain size without company-sponsored retirement plans are required to contribute to an IRA plan — unless they chose to opt out. These plans are relatively easy to administer for employers who simply “connect” their employees to a retirement plan run by a qualified financial institutions. The plans save small businesses from the hefty paperwork and sometime onerous regulations associated with traditional retirement plans.
Read the full post at MarketWatch.
Bob Pozen is a Senior Lecturer at the MIT Sloan School of Management.