According to research by Jack VanDerhei of the Employee Benefit Research Institute, the combination of auto-enrollment and auto-escalation can substantially boost a worker’s chances of retiring with enough income.
In Thaler’s world of defaults and nudges, much depends on getting the details right. The wrong kind of “nudges” can be destructive. Many companies encourage workers to invest much of their retirement in company stock, something Thaler has argued is too risky for workers.
He also says many companies are encouraging workers to save too little. “One problem with automatic enrollment is most firms start people out at too low a rate,” he said in his May speech.
Still, the best-designed nudge in the world won’t get somebody to save enough for retirement if she simply isn’t being paid enough. Thaler’s nudges also can’t reach the millions of Americans who don’t have retirement plans at work—at least not yet.
That may change. Several states are setting up automatic individual retirement accounts (IRAs) aimed at the third of workers who don’t have access to 401(k)s or pensions, and the details of many of those new plans seem ripped from the pages of Thaler’s research.
Oregon, which launches the first auto-IRA program this month, will start workers out saving 5 percent of their salaries, unless they object. And their contributions will auto-escalate every year by 1 percentage point, rising until they hit 10 percent.
This article was provided by Bloomberg News.