Principal Step Ahead Retirement Option allows participants to automatically increase their contributions by a set percentage each year, the company said in a news release. Participants specify the number of years they want their savings to be “stepped up” within the maximum allowed by the plan or the IRS. Employers maintain control by selecting the month for the automatic increase that is right for their company.
“The numbers are staggering. Our research shows that 80% of retirement plan participants are not saving enough to secure an adequate retirement income. While automatic savings plans, like the 401(k), are one of the most effective ways to get people to start saving for retirement, the bigger challenge is to get them to keep increasing their savings. Far too often, workers stay at a lower savings rate after they enroll because they aren’t comfortable making investment decisions,” Julie LeClere, director, Retirement and Investor Services, Principal Financial Group, said in the news release.
The notion that participants, while well-intentioned, often fail to act on those intentions is not exactly new, nor is the reality that inertia is a looming barrier to proper savings behavior. Behavioral finance studies published in 2001 by Shlomo Benartzi and Richard Thaler, the former an economics professor with the Anderson School at the University of California at Los Angeles, the latter an economics professor with the University of Chicago Business School, indicated that that people often put off decisions that would mean giving up part of their paychecks immediately (see Philips Gets “SMarT” ). Their program design was termed “Save More Tomorrow”, or SMarT.
Similar programs have been unveiled in recent months by Vanguard (see Vanguard Rolling Out 401(k) Enrollment Tool ), Putnam (see Putnam Program Boosts Participant Savings Rate ), and ADP (see ADP Expanding Save Smart Availability ).