The new program, dubbed “One Step” by the Valley Forge, Pennsylvania-based company, automatically enrolls employees in their company’s 401(k), annually increases plan contributions by a set percentage, provides automatic asset allocation of investments over time, and advises participants on potential asset distribution vehicles upon retirement. It is scheduled for rollout in January 2004, according to a news release.
In developing the new product, Vanguard turned to findings in the field of behavioral finance and found that “auto-pilot” 401(k) programs, a category that includes One Step, may help boost long-term retirement savings in the US. That is because many workers tend to struggle with financial savings decisions, relying more on inertia and procrastination rather than showing the necessary imitative in not only enrolling for savings plans but also rebalancing investment allocations, the Vanguard news release said.
“The goal of the One Step program is to ease the many complexities of retirement planning for employers and plan participants,” said Bert Dalby, Principal, Vanguard Institutional Investor Group. “One Step provides participants with a single, automatic solution to their retirement needs. It will help participants get on the right track in terms of savings and investing, and subsequently leverage inertia to their advantage.”
Putting these behavioral finance theories in to practice was the impetus for Vanguard’s Save More Tomorrow (SmarT) automatic savings plan (See Phillips Gets ‘SmarT’ ). Designed by Richard Thaler at the University of Chicago and Shlomo Benartzi at UCLA, participants sign up for the their plan and then elect to have their deferral rates increased automatically.
Vanguard first launched a SmarT pilot with Philips Electronics North America in 2002. After determining the pilot a success, Vanguard then introduced automatic contribution increase components to 80 Vanguard clients targeting over 200,000 participants in November 2003.