Some modest good news on the retirement front. New studies show that even though America faces a big and looming retirement crisis, a surprising amount of it could be helped through some simple, low-pain behavioral fixes.
A new study conducted by finance professors at Cornell, Carnegie Mellon and UCLA found that explaining retirement savings options to people more simply could produce an outsize effect on how much they were likely to save. In a study involving 2,255 people across 86 companies, they found that just rephrasing retirement savings could produce a 17% jump in likely savings rates among the lowest paid.
Those in the bottom 10% of the study, earning less than $46,000 a year, raised their likely savings rate from just below 7% to 8% when savings were presented in dollar terms instead of percentages of income. In other words, they could relate better to the idea of saving “8 cents of every dollar” they earn rather than “8%” of their income.
Lots of people hate math. Why does the entire retirement system seem to be run by people who like math for people who like math? And why should we be surprised if that leaves other people cold?
Meanwhile another study has found that many of the people who are missing out on the company match in their 401(k)—in other words, missing out on free money—are not doing so because they can’t afford the savings, but because they are confused by all their benefit options. The researchers proved this to be true because many people missing out on their company match were also overpaying for health insurance by choosing a suboptimal plan.
“One-third of employees overpay for health insurance each year by $1,700 and simultaneously make no voluntary retirement contributions,” conclude Adam Leive and Leora Friedberg of the University of Virginia and Brent Davis of the TIAA Institute. Ouch.
Given the mind-numbing complexity of the tax, benefits and retirement systems today it’s probably surprising it’s not more.
The good news here is that this means we could in theory do quite a lot to help the average situation of the average American by making the system simpler to understand and to use.
The question is whether we are going to.
The studies come as Congress at last—at last—moves to make automatic enrollment standard for all who are eligible in their company’s 401(k). Few things have done more to help retirement preparedness in the modern era than the 2006 law which first made automatic enrollment widespread.
Saving in a 401(k) is still voluntary, but with automatic enrollment people have to choose to opt out instead of choosing to opt in.
Some states are going further and introducing automatic enrollment IRAs for those who aren’t included in a 401(k) plan.
We still face a looming national retirement crisis. According to the Federal Reserve’s most recent study, the median retirement account for people who don’t have a college degree is less than $40,000. That for people of roughly average incomes is even smaller, at $28,000. Nearly a quarter of workers tell Northwestern Mutual that they have set aside less than $25,000. Multiple other sources argue that even as we get older and have to plan for decades in our senior years, vast numbers of people have set aside desperately little.
Every nudge helps.