It’s no secret that Americans are lousy at saving for retirement, and many will struggle to live comfortably in old age.
A Vanguard report from 2015 says its clients over age 65 had, on average, about $214,000 in a 401(k) account — and that doesn’t include the many who don’t have access to one, regardless of which money manager is used. Numbers for households with members between 54 and 65 years old are even grimmer.
That’s the bad part. The good part is we have gotten better, thanks to tweaks to 401(k) policies. Most large companies now make participation in the retirement plan the default choice, meaning the real work is to opt out, not to sign up. And most have two other default choices: a 3% savings rate and a target-date fund.
But a few more changes could do more to get people to save more for retirement, says Richard Thaler, a behavioral economist at the University of Chicago.
“The only thing that works is making savings automatic,” he says.
He sat down with MarketWatch and spelled out his wish list:
Change the default savings rate to 6%
Companies use 3% because a letter from the Treasury Department in the 1990s that assured them that automatic enrollment was legal used that figure as an example, he says.
“That stuck,” he says. “It makes no sense.”
Make annual increases in the savings rate the default option
Thaler says we’re bad at starting today and good at procrastinating — whether it’s saving more, starting a diet or something else we know we should do. To capitalize on that, some 401(k) plans now allow participants to preprogram annual increases in their savings rate — something he calls “save more tomorrow” — but it’s not widespread.
“In my ideal plan, we start people at 6%, raise that 1% a year until they hit, say, 12%,” he says. “Those two things would pretty much solve the problem.”
So why don’t more companies do this?
Thaler says one reason may be that it could cost companies more because of the match they offer for some 401(k) savings; according to Vanguard, the most popular company match is 50 cents for every dollar saved for the first 6% of pay. Some might not want to do the programming work involved. Or no one sees it as their job.
“If your employees aren’t saving enough, it’s your fault,” he says he told a gathering of 600 company pension-fund representatives. “We know how to do this. If you have 70% participation rate instead of 90%, that’s your fault. If you have a 3% saving rate, that’s your fault.”
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