And the award goes to…automatic enrollment

The retirement industry took note when Richard H. Thaler, professor at the University of Chicago, won the 2017 Nobel Prize in Economic Sciences. Professor Thaler’s work in behavioral economics set a solid foundation for automatic enrollment and escalation plan design features that have helped millions of workers save more for retirement.

Behavioral economics?

Simply put, behavioral economics recognizes that people don’t make rational decisions when it comes to how they spend or save money. And it’s because:

  • People choose immediate gratification over long-term happiness.
  • People can’t picture themselves too far into the future.

In terms of retirement savings—behavioral economics finds that despite knowing they should enroll and participate in their employers’ retirement plans, many employees don’t.

A “nudge” is needed

Thaler’s research found that people can be “nudged” to make beneficial decisions. His work encouraged lawmakers to include automatic enrollment and automatic escalation features for 401(k) plans in the 2006 Pension Protection Act. A “nudge” that has added billions in overall retirement savings.

Your employees say they want help

We asked employees what they thought of automatic plan features, and the results were positive. Employees say they want and need you to help them save more for retirement. And, they like it when the retirement plan does some of the work.1

  • 84% are okay with automatic enrollment with a starting deferral of 6%.
  • 83% are fine with automatic contribution escalation of 1% each year up to 10%.
  • 79% of nonparticipants are okay with a re-enroll feature for those who’ve opted out in the past.

Bottom line, it’s hard to argue with science

Automatic enrollment and escalation can help your employees save more for retirement. This flier explains the science behind it (PDF). If you’ve been thinking about adding these features to your retirement plan, talk with your financial professional or third party administrator, if you work with one. Or give us a call. We want to help.

1 Principal, Retirement Readiness Participant Survey, January 2017.

This communication is intended to be educational in nature and is not intended to be taken as a recommendation.

Richard H. Thaler and the University of Chicago are not an affiliate of any company of the Principal Financial Group.

Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, Iowa 50392.