Inertia plays role in saving for retirement
For many savers, biases might be contributing to their long-term efforts to fund their retirement.
“Status quo bias,” or inertia, keeps you from taking action.
That is, “In choosing among alternatives individuals display a bias toward sticking with the status quo,” according to “Status Quo Bias in Decision Making,” published in 1988 in the Journal of Risk and Uncertainty (tinyurl.com/5n7yy4ue). Recognizing inertia as a stumbling block has led to advances in 401(k) decision-making by turning the decision into an optout instead of an opt-in choice.
The recent release of “How America Saves 2022” (tinyurl.com/2p8cvkkv) by Vanguard, an investment management company, found that in 2021, “participant retirement plan behaviors remained largely unaffected and, in some areas, continued to improve. This is a testament to the growing use of automatic solutions, which leverage inertia for the benefit of the participant.”
Automatic solutions include auto-enrollment and target date funds, with the latter described by the Securities and Exchange Commission’s Investor.gov as being “designed to make investing for retirement more convenient by automatically changing your investment mix or asset allocation over time” (tinyurl.com/2xzcvj9d).
Vanguard’s analysis found that at year-end 2021, 56% of the retirement plans that are part of Vanguard’s
recordkeeping business had adopted automatic enrollment (up from 46% in 2017), including 75% of plans that had at least 1,000 people participating. Overall, 64% of all Vanguard participants were “solely invested in an automatic investment program.” That figure was up from 36% at year-end 2012.
Two-thirds of the Vanguard automatic enrollment retirement plans also automatically increased the deferral rate (the percentage of an individual’s income contributed to the plan).
Ninety-nine percent of all the Vanguard plans with automatic enrollment defaulted the participants into a balanced investment strategy in 2021, with 98% selecting a target date fund as the default.
Vanguard is not the only investment company to report a rise in automatic options.
Fidelity’s first-quarter report of savings behavior for 2022 (tinyurl.com/3ct3pxy7), which surveyed balances for more than 35 million IRA, 401(k) and 403(b) retirement accounts, found that 85% of Gen Z savers (those born between 1997 and 2012) had their entire 401(k) savings in a target date fund.
Inertia works. Fidelity’s “Building Financial Futures” (tinyurl.com/4xpjfb69) noted that 90% of employees who are auto enrolled do not opt out.
Auto enrollment may become mandated. In March, the U.S. House of Representatives passed the Securing a Strong Retirement Act (tinyurl.com/mryadypb), which has a section requiring employers that establish new defined contribution plans (with some exceptions) to automatically enroll new employees, when they are eligible, at the level of at least 3% of the employee’s pay, then automatically increase that annually by 1% up to at least 10%, but no more than 15%. The Senate is working on its own version of retirement legislation.
If your company’s 401(k) plan currently has automatic deferral rate increases and target date funds,
should you choose those options — or opt out?
As to participating in the retirement plan, you know my point of view — you’d have to have a very good reason not to participate. The same holds for automatic deferral increases — the more, the better.
As to automatic investments, that’s a personal matter. If you are not able or willing to spend time studying your options, the target date funds will help you participate in the stock and bond markets. That’s a definite advantage over just putting your money in the “bank” by choosing a money market option.
I’m grateful to the 401(k) providers who married behavioral economic theory with 401(k) enrollment. Sometimes we need to be placed in positions that have favorable results in spite of our status-quoseeking selves.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2021 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.