Putting off tough decisions can have good results
Most workers save at levels well below the plan and regulatory maximums, and a large number save only at the level matched by employer contributions. Even with the addition of "catch-up" contributions, recent studies indicate that most workers simply are not taking advantage.
Numerous studies do suggest, however, that workers know they should be saving more, and express concern that they are not saving enough to provide for an adequately funded retirement. The problem seems to be one of unfulfilled good intentions.
A 2001 study by Richard Thaler at the University of Chicago and Shlomo Bernatzi at the University of California, Los Angeles, titled "Save More Tomorrow: Using Behavioral Economics To Increase Employee Saving" indicated that participants were not only interested in obtaining help in overcoming this savings inertia; given a chance, they displayed an encouraging willingness to increase dramatically their rate of deferral. Their idea was a program called Save More Tomorrow (SMT), which gave people the ability to agree today to a higher deferral rate in the future.
In the study, most people (78%) offered the SMT plan elected to use it, virtually everyone (98%) who joined the plan remained in it through two pay raises, and the vast majority (80%) remained in it through the third pay raise. More importantly, the average saving rate for SMT plan participants increased from 3.5% to 11.6% over the course of 28 months.
This month's Know How introduces the concept of signing up "today" for a higher rate of deferral in the future. A growing number of providers now promote this capability, and implementing it should not require any changes to your plan document. There may be operational issues associated with coordinating this kind of election with your payroll provider, but these should be manageable. As always, we look forward to your comments.